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To the quiet delight of policymakers, the Japanese yen just keeps declining. A cheap yen boosts exports, still a key determinant of growth, and helps reflate the economy. So far, Japan is having its cake and eating it. Currency depreciation, courtesy of widening interest-rate differentials, has done little to diminish foreigners’ appetite for Japanese equities.

There are hints, however, that capital outflows are growing – suggesting a weaker yen could persist. Anecdotal evidence shows US investors are starting to hedge their currency exposure. That will probably continue: the stock market’s 18 per cent gain over the past three months shrinks to half that in dollar terms. Meanwhile, Japanese investors are putting more cash to work overseas, for instance in Nomura’s recently launched $10bn Indian fund. There is a fair chance that some of the retiring baby boomers’ $1,500bn or so of financial assets and pension payouts will wind up overseas too.

Theoretically, outflows will diminish and the currency will strengthen as Japan returns to normalised monetary policy next year. The rub is that even once Japan ditches the zero interest-rate policy, it is likely to keep rates below inflation. In real terms, therefore, the interest-rate differential with other currencies could widen rather than narrow, given rising US interest rates. Negative real interest rates in Japan play to Tokyo’s desire for inflation – and pensioners’ penchant for international assets. Until US rate expectations peak, dismissing yen weakness as a temporary phenomenon looks unwise.

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