Experts believe that Japan's increasing dependence on foreign digital services like Amazon (NASDAQ:AMZN) Prime and YouTube Premium by Google Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) is contributing to a rising "digital deficit," potentially pressuring the yen's value.

What Happened: Japan's heavy reliance on foreign digital services is causing a significant imbalance in its digital trade, Nikkei Asia reported on Monday. This imbalance, termed the "digital deficit," is feared to contribute to the long-term depreciation of the yen against the dollar.

Japan's digital deficit, which includes fees for digital advertising and intellectual property royalties, surpassed the overall services deficit in 2023, reaching 5.5 trillion yen ($34 billion). The deficit continues to grow, with a 14% increase recorded from January to May this year.

Experts suggest that the digital deficit is a major factor dragging down Japan's services trade balance. The deficit exerts a steady downward pressure on Japan's overall current balance, according to Kazuma Kishikawa, an economist at the Daiwa Institute of Research.

As Japanese companies look to digitize their businesses, they largely rely on foreign infrastructure providers. By fiscal 2020, Amazon Web Services (AWS), Microsoft, and Google, all from the U.S., accounted for 50% to 75% of cloud computing services in Japan.

Kenji Kushida, senior fellow at Carnegie Endowment for International Peace, said, "It's not a Japan problem per se, it's the absolute dominance of these global platforms that came out of the Silicon Valley model, a very small segment of the U.S. economy, that took over everybody."

However, he also expressed he is "very bullish" about Japan's startup ecosystem adding that more support for exporting their services could help Japanese companies, including startups, to enter new markets.

Despite the growing digital deficit, experts believe it is more realistic for Japan to make up for it in other areas, such as inbound tourism and content exports, rather than simply reducing digital-related deficits.

Why It Matters: The yen's value has been under pressure due to several factors, including interest rate differentials and inflation shocks. In July, the yen faced a continued decline due to the significant interest rate differential between the Bank of Japan and the Federal Reserve. The yen's depreciation did not halt even after the Bank of Japan abandoned its longstanding negative interest rate policy, adjusting the rate to zero.

Furthermore, the yen experienced a significant drop following the release of unexpectedly low U.S. inflation figures and potential interventions from Japanese authorities.

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari