As Japan's slow economic growth exacerbates capital outflows, the yen is under further pressure and is mired in depreciation.

According to analysts quoted by Bloomberg, the interest rate spread between Japan and the US is the reason the yen continues to weaken, especially considering that the fiscal policies adopted by incoming US President Trump may trigger inflation, and trade and investment flows have exacerbated this impact.

According to the data, Japan's current account surplus for the third quarter was 8.97 trillion yen (about 57.5 billion US dollars), but this figure was offset by outflows of direct investment and securities investment, limiting the yen's potential increase. Moreover, the outflow of direct investment and securities investment in the third quarter far exceeded the level of the first and second quarter of this year. For details:

First quarter: Direct investment outflows: 4 times; securities outflows: 0

Second quarter: Direct investment outflows 4.4 percent, securities investment inflows 4.1 percent

Third quarter: direct investment outflow 4.3 percent, securities investment outflow 12.2 percent

In September, the exchange rate of yen against the US dollar hit a 14-month high as traders closed large-scale arbitrage transactions in yen, but then fell by about 10%. Today, it once fell to its lowest point since July, and is now at 155.75.

Shusuke Yamada, head of currency and interest rate strategy in Japan, said that since a large portion of the surplus comes from basic income and is reinvested overseas, it is easy to be misled if you only focus on current account balances.

Japan's basic income surplus for the third quarter reached a record high of 12.2 trillion yen, mainly return on investment (current account measures exports and imports, and other cross-border flows, including wages and return on investment). These offset the deficit in goods and services and increased current account surpluses.

Hideki Shibata, senior strategist at Tokyo Intelligence Laboratory Co, said:

“The trade balance deficit has led to a sell-off of yen to meet foreign currency demand, and this trend will continue.”

Furthermore, Japan also attracts the lowest direct investment among major economies. Since 1996, Japanese direct investment outflows have surpassed inflows almost every quarter. According to Bloomberg's analysis of International Monetary Fund data, as of the end of June, Japan's outstanding foreign direct investment accounted for 8.3% of GDP, the lowest among the top 20 global economies. In comparison, the UK was 99% and the US was 57%.

The Bank of Japan estimates that Japan's potential economic growth has been stagnating for the past 20 years. The most recent data is 0.6%, which further indicates an increase in capital outflows. Although Japan has attracted more investment in securities, the outstanding balance represents 90% of GDP. However, Hirofumi Suzuki, the chief foreign exchange strategist at Sumitomo Mitsui Bank in Tokyo, believes that most of these inflows did not contribute to the appreciation of the yen:

“Because they are hedged and mostly speculative, demand for long-term holdings isn't growing.”