The Real Purchasing Power of the Yen Has Fallen Lower Than the Turkish Lira

@BardKidd:Seeing the Japanese yen trending due to its drop, let's talk about this today.
This sounds truly terrifying: everyone knows the Turkish Lira is a terrible currency, with 70% inflation and long-term plunges. But Robin Brooks, a senior fellow at the Brookings Institution, stated: the real purchasing power of the Japanese yen has fallen lower than that of the Turkish Lira.

I checked, and since the end of 2019, among the world's major currencies, only one has experienced a more severe depreciation in real effective exchange rate than the yen—the Egyptian Pound.

This is absurd. Isn't Japan a G7 country? Isn't it the world's third-largest economy? How did it stoop to competing with the Lira for the bottom?

This issue can be broken down into three layers to make it simple.

First layer: Every time Japan uses AWS, runs Google ads, or buys Microsoft licenses, it is "shorting" its own currency.

Last year, Japan's "digital deficit" hit 6.46 trillion yen, roughly over 43 billion USD. What does this mean? Japanese companies and citizens rely heavily on cloud services and software from Amazon, Microsoft, and Google. With every payment, yen is converted to dollars and remitted back to the US.
This has more than tripled in a decade.

What's more fatal is that this expenditure is rigid. Even if the exchange rate plummets, companies still have to use the cloud servers and buy the software. Depreciation doesn't reduce imports; instead, they have to fork out even more yen to exchange for the same amount of dollars. This is called "imported depreciation."

Everyone is talking about the internet era and the AI era, but the deeper the digitalization, the faster the yen bleeds.
(South Korea, which invested in memory chips 20 years ago, is laughing all the way to the bank)

Second layer: Young Japanese people are legally, continuously, and irreversibly moving their money overseas.

I wonder if you folks have heard the term "Mrs. Watanabe," which refers to Japanese housewives engaging in forex carry trades.
For the past few decades, they borrowed zero-interest yen, converted it to dollars to earn the interest rate spread, and then closed their positions to convert back to yen when they profited. Objectively, they acted as a "breakwater" during sharp yen declines.

But these people have grown old. The average life expectancy for Japanese men is 81, and 87 for women; half of the active FX traders have aged out within 30 years.

So what are the young people doing? In 2024, the Japanese government introduced a tax-free "New NISA" system. NISA was originally meant to encourage Japanese people to buy Japanese stocks tax-free. After the reform, Tokyo white-collar workers in their twenties began making monthly fixed investments of tens of thousands of yen into US stock index funds—S&P 500, Nasdaq, Nvidia—because they keep going up, and as long as they go up, they keep buying.

It directly exempts the 20% capital gains tax, and 50% of the money is flowing entirely into overseas stock markets. Moreover, they aren't just speculating on stocks; they are genuinely doing asset allocation. They plan over a decades-long life cycle and won't sell just because of exchange rate fluctuations.

In other words, the "Mrs. Watanabes" of the past would bring their money back after making a profit, but now the young people's money goes out and never comes back.
(For example, we previously had a type of fund called QDII here, which was a legal offshore channel for overseas investment. It suddenly became very popular, and then restrictions were immediately imposed)

Third layer: Japan looks very rich on paper, but the money isn't coming home.

In 2024, Japan's current account surplus hit a record high, and overseas investment returns reached 40.21 trillion yen, meaning Japanese companies made a killing.
If you only look at this number, the yen should be rising.

The problem is, these profits are simply not repatriated.
Domestic interest rates in Japan are pitifully low, while they can get 4%-5% returns overseas. What incentive do multinational companies have to convert their money back to yen? Is the boss crazy?

In 2023, the profits retained by Japanese companies at their overseas subsidiaries reached a staggering 10.57 trillion yen, tripling over ten years.

This creates an absurd situation: Japan's "current account surplus" is fake, and there are very few real yen buyers in the foreign exchange market. The books look good, but the body is honest.

Therefore, when these three financial layers overlap, the yen collapses.

In terms of numbers, 6 trillion yen in tech toll fees flows out every year.
In terms of people, the youth are voting with their feet by moving their savings to US stocks.
In terms of capital, trillions in overseas profits would rather earn interest abroad than come home.

Some folks might ask, can't the Japanese government step in to manage this? But right now, their debt accounts for over 250% of GDP, with a total volume exceeding 1,450 trillion yen. Do you dare to raise interest rates significantly? National bond interest payments would instantly explode, mortgage rates would soar, and the 227 trillion yen in personal housing loans would immediately become a ticking time bomb.

So the Bank of Japan can only choose one between "protecting the exchange rate" and "protecting the fiscal budget." Obviously, it chose to protect the fiscal budget, letting the yen act as a "pressure relief valve" to dilute the real purchasing power of the debt through depreciation.

On April 30th, the yen hit 160.72 yen to 1 USD, once again pushing near the lowest line since 1990. Sanae Takaichi's cabinet urgently threw in 5.4 trillion yen (about 34.5 billion USD) to intervene in the market, barely pulling it back to around 155.

Ultimately, the yen's predicament is not just an interest rate differential issue. The essence behind it is the real situation of a digital infrastructure monopolized by other countries, young people moving their money overseas, overseas profits not returning home, and the fiscal budget held hostage by debt.

So, what lessons can we learn from this?

First, the strength of a country's currency ultimately depends not on your GDP ranking, but on whether your industrial chain has independent pricing power.

Second, when "not wanting to bring profits home" becomes the norm for an economy, no matter how large the book surplus is, it's just paper wealth.