Amid chronic yen depreciation, Japanese households and businesses are increasingly diversifying their yen assets into foreign currencies due to concerns that the yen's value may decline further. The increase in foreign currency deposits from April to June this year marked the largest since the full liberalization of foreign currency deposits in 1998.
According to the Nihon Keizai Shimbun (Nikkei) on August 21, the average balance of foreign currency deposits at domestic banks in Japan for the April to June period was approximately 26.1 trillion yen, an 18% increase from the same period last year. Even excluding the impact of the strong dollar, the inflow was significant. The increase of 3.9772 trillion yen exceeds Japan's trade deficit for the fiscal year 2025, which is projected at 1.7 trillion yen. The government and the Bank of Japan intervened in the market to purchase yen on seven occasions from 2022 to 2024, averaging 3.5 trillion yen per day. In terms of the increase in foreign currency deposits alone, this amount surpasses the average daily yen purchase intervention by authorities.
Individuals' foreign currency deposits reached approximately 6.7 trillion yen, an 8% increase. Sony Bank reported that its foreign currency deposit balance reached 800 billion yen in May, surpassing 700 billion yen for the first time in 15 months since February 2025. While foreign currency trading has traditionally been dominated by low-cost FX margin trading, Nikkei noted that the investor base is expanding, particularly among older individuals with surplus retirement funds. Funds are flowing not only into foreign currency deposits but also into overseas stocks. According to the Bank of Japan, the balance of household investments in foreign securities was 46.4618 trillion yen at the end of March, a 23% increase over the past year.
Nikkei highlighted that despite the yen already being at a historically low level, the demand for foreign currency continues. In the past, Japanese individual investors often engaged in 'buying on dips' when the yen appreciated, purchasing foreign currencies like the dollar at relatively lower prices. However, the current trend is different. Investors are buying foreign currencies at high prices without waiting for a rebound in the yen. Nikkei assessed that the expectation of further declines in the yen's value is driving this demand for foreign currency. The currencies being purchased are also diversifying beyond just the dollar. Urata Takafumi, a senior economist at SMBC Trust Bank, noted, "Since the Trump administration, there has been an increase in depositors diversifying into various currencies, including the euro."
Businesses are also increasing their foreign currency holdings, anticipating continued yen depreciation. From April to June, corporate foreign currency deposits rose to approximately 19.3 trillion yen, a 22% increase from the previous year. Ueno Tsuyoshi, a senior economist at the NLI Research Institute, told Nikkei, "The deep-rooted expectation that the yen will weaken further is causing export companies to delay converting the dollars they earn into yen." He also noted that companies considering overseas expansion are securing the necessary dollars in advance. Japanese firms are also increasing the issuance of foreign currency-denominated corporate bonds.
The yen's value fell to as low as 163 yen per dollar in July, the lowest level in 39 years. Although the government and the Bank of Japan intervened to purchase yen at the end of July, the value remains significantly below the pre-2011 peak of around 75 yen per dollar following the Great East Japan Earthquake. Despite the short-term interest rate swap market reflecting an 80% probability of a rate hike by the Bank of Japan in September, yen purchases have not gained traction. This is due to the structural supply and demand dynamics where households and businesses are buying foreign currency, which in turn puts pressure on the yen. The cycle of yen depreciation concerns leading to foreign currency purchases, which then further fuels yen depreciation, poses a challenge. The issue is that the consequences of this cycle do not remain confined to the financial markets.
On August 20, the Japanese Ministry of Finance announced that imports in July totaled 12.1462 trillion yen, a 27.8% increase from the same month last year, marking a record high for the second consecutive month. Notably, oil imports surged to 1.4089 trillion yen, an 87.8% increase. While the import volume increased by only 5.5%, the yen-denominated price of oil rose by 78.0%. This increase is attributed to rising oil prices due to instability in the Middle East, compounded by yen depreciation.
The increased import costs from yen depreciation and rising oil prices indicate that Japan's income is flowing out to foreign markets. The Japanese government is continuing electricity and gas price subsidies from July to September, but once these subsidies end, rising energy prices could translate into inflationary pressures.
* This article has been translated by AI.
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