Synopsis:

BofA explains that the yen's sharp decline since 2022 is primarily due to widening interest rate differentials caused by policy divergence between a cautious Bank of Japan (BoJ) and more aggressive global central banks. However, structural economic factors have also played a significant role in the yen's prolonged weakness.

Key Points:

• Interest Rate Differentials: The primary trigger for the yen's fall has been the widening gap between Japanese and global interest rates, as the BoJ remains cautious while other central banks raise rates.
• Structural Outflows: Chronic trade deficits and a surge in net outward foreign direct investment (FDI) have weakened the yen's effective exchange rate beyond interest rate impacts.
• Economic Structural Issues: Low productivity, worsening terms of trade, and a shrinking labor supply are structural problems in the Japanese economy contributing to yen weakness.
• Outward Portfolio Investment: Prolonged expectations of a weak yen have led to increased outward portfolio investment by Japanese households.

Conclusion: BofA attributes the yen's sell-off since 2022 to both interest rate differentials and deeper structural issues within the Japanese economy. While policy divergence has been a key driver, chronic trade deficits, low productivity, and increased outward investments are also significant factors contributing to the yen's continued weakness.