Japan's addiction to OTT services and social media is putting a major dent in the yen

Young Japanese adults who are the country’s largest consumers who of digital services are unintentionally depleting the value of the yen, and putting Japan’s currency in a dangerous position. Several young adults spend hours of their day on services like YouTube Premium, Instagram, Amazon Prime, X, Line, and d Anime Store.

Japan’s significant reliance on foreign digital services for entertainment and business operations is creating a “digital deficit,” as the country imports more digital services than it exports, as per a report by Nikkei. This imbalance is thought to contribute to the yen’s long-term decline against the dollar, according to foreign exchange market experts.

This digital deficit includes costs such as digital advertising fees and royalties for streaming foreign content, which heavily impact Japan’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 per cent, showing a growing trend.

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 pointed out by Kazuma Kishikawa, an economist at Daiwa Institute of Research.

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.

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 per cent to 75 per cent of Japan’s cloud computing market by fiscal 2020, according to the Japan Fair Trade Commission.

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.

Japan’s rigid labour 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 labour-intensive market.

Despite these hurdles, Kushida is optimistic about Japan’s startup ecosystem, which has improved significantly in recent years. He believes Japanese companies need more support to export their services. Kishikawa suggested that public institutions could assist with market research and support for startups entering new markets. Currently, the Japan External Trade Organization mainly supports manufacturers, leaving digitally-focused small and medium enterprises with fewer resources.

Kamei emphasized that being close to the market is beneficial and suggested that while Japanese companies might struggle in foundational areas like generative AI, they can excel in specialized services. He highlighted Japan’s potential in content exports, such as anime and manga. Investing strategically in content and distribution channels, similar to Netflix or Naver Webtoon, is crucial for leveraging consumer data and boosting exports.

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.

Experts agree that the goal shouldn’t be merely to reduce digital deficits but to enhance Japan’s overall economic competitiveness. Foreign tech investments in Japan, such as AWS’s plan to invest 2.3 trillion yen in new data centres, can be beneficial. Kengo Wataya from Mitsubishi Research Institute highlighted that digitization could create new service opportunities and address labor shortages, although it may not directly improve Japan’s trade balance due to many manufacturers relocating abroad.

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 behaviour, driven by the digital deficit and increased overseas investments, contribute to the yen’s depreciation.

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.

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.