Japan’s Digital Deficit: A Growing Concern For Economy And Yen

Japan’s digital deficit, which includes costs such as digital advertising fees and royalties for streaming foreign content, heavily impacts the nation’s service trade balance. In 2023, this deficit reached 5.5 trillion yen ($34 billion), surpassing the overall services deficit of 2.9 trillion yen. From January to May this year, the deficit increased by 14 percent, indicating a growing trend.

 

Influence on Currency Value and Current Account Balance

The value of a country’s currency is influenced by its trade balance. Japanese importers often need to exchange yen for foreign currency to pay for imported goods and services, including digital services. This ongoing digital deficit exerts constant downward pressure on Japan’s current account balance because it is stable and less affected by seasonal variations, as noted by Kazuma Kishikawa, an economist at Daiwa Institute of Research.

 

Accelerating Deficit Since the Pandemic

Since the late 2010s, Japan’s digital deficit has been widening, a trend that accelerated during the COVID-19 pandemic. The demand for digital services soared during lockdowns, increasing imports, while exports have remained stagnant since 2022. Kishikawa predicts that the digital deficit will continue to grow as digitization advances.

 

New Technologies and Infrastructure

The emergence of new technologies such as generative AI and satellite technology is expected to further widen the deficit. Most of the infrastructure for these technologies is provided by foreign companies like Amazon Web Services (AWS), Microsoft, and Google, which dominated 50 percent to 75 percent of Japan’s cloud computing market by fiscal 2020, according to the Japan Fair Trade Commission.

 

Global Dominance and Domestic Challenges

Kenji Kushida, a senior fellow at the Carnegie Endowment for International Peace, noted that this is not solely a Japanese issue but rather the global dominance of Silicon Valley platforms. These platforms had significant advantages in business models and venture capital investments, enabling their growth. In contrast, Japan’s early digital platforms, developed by domestic telecom carriers, did not expand globally.

 

Labour Market and Adaptation

Japan’s rigid labor market also slows down its ability to adapt quickly, as mentioned by Takuya Kamei from Nomura Research Institute. Digital services require rapid hiring of skilled employees, which is challenging in Japan’s labor-intensive market.

 

Addressing Online Piracy

Yayoi Sakanaka from Mizuho Research & Technologies also sees potential in Japan’s content industry. Addressing online piracy, which cost Japan 2 trillion yen in 2022, could significantly increase digital exports. However, reducing the digital deficit alone is unrealistic. Sakanaka suggested that Japan should also focus on other growth areas, such as inbound tourism.

Impact on the Yen

The growing digital deficit indicates a significant structural change in Japan’s economy, which continues to put downward pressure on the yen. British bank Barclays noted that changes in Japanese consumer and business behavior, driven by the digital deficit and increased overseas investments, contribute to the yen’s depreciation.

 

Future Projections

Mizuho Research & Technologies projected that if the digital deficit doubles by March 2026, it could cause the yen to depreciate by another 5 to 6 yen against the dollar. While the exact impact is difficult to quantify, the expanding digital deficit is one of many factors behind the yen’s recent depreciation. At the beginning of 2021, the yen traded at fewer than 110 per dollar but slid past 160 per dollar in June.

 

Additional Influencing Factors

Shoki Omori from Mizuho Securities pointed out that other factors, like the appeal of dollar-denominated assets and yen carry trades, likely had a more significant impact on the exchange rate. He added that the monetary policies of the Bank of Japan and the U.S. Federal Reserve also played a large role.