PSPINC CEO Kenichi Uchikura's Blog

Yen Depreciation: A Significant Challenge for U.S. Companies Selling Services in Japan

 

For U.S. companies offering services priced in Japanese yen, the ongoing yen depreciation poses a major challenge. Our company is among those affected, and we’ve taken some time to consider why the yen has remained weak for such an extended period.

 

What is Yen Depreciation?
First, it’s important to understand what yen depreciation means. It refers to the state where the value of the Japanese yen is lower compared to the U.S. dollar. Simply put, it reflects the currency market's preference for the dollar over the yen as an investment choice.

 

Currently, interest rates in the U.S. exceed 4%, while Japan’s rates remain below 1%. Given this significant difference, the choice of where to invest becomes clear. Many investors are opting to sell yen and buy dollars, a movement that is one of the main drivers of yen depreciation.

 

The Impact of Yen Depreciation
Yen depreciation drives up the cost of imported goods, resulting in higher prices and inflation. Japan is currently experiencing the effects of this phenomenon. Some may argue that Japan could counteract yen depreciation by raising interest rates, but there are reasons this approach is not feasible for the country.

 

Why Japan Can’t Easily Raise Interest Rates
If Japan were to raise interest rates, the cost of servicing its massive public debt would soar. This would strain the government’s finances, making it challenging to maintain public services such as social welfare and infrastructure. In other words, raising interest rates could risk pushing Japan toward fiscal insolvency.

 

Japan’s current low-interest-rate policy is a measure designed to keep debt servicing costs manageable for the government. This approach prioritizes maintaining fiscal operations over other economic factors. While it is not explicitly aimed at benefiting citizens, the collapse of government functionality would inevitably have severe consequences for public welfare. This delicate balance poses a significant challenge for Japan’s economy.

 

Conclusion: Resolving a Complex Problem Takes Time
Addressing yen depreciation would require raising interest rates, but that is contingent on achieving fiscal sustainability in Japan. However, fiscal reform takes time, meaning companies and citizens affected by yen depreciation will likely have to endure its effects for a while longer. Resolving this issue demands a long-term government strategy and structural reforms in the economy.

 

Understanding the background of yen depreciation and finding ways to adapt is essential for businesses to remain resilient in these challenging times.