Why Japan's rising OTT, social media addiction is weakening Yen
Japan's increasing reliance on foreign digital services for entertainment/business operations, is leading to a "digital deficit," causing the Yen to depreciate against the US Dollar. Young adults, who are the largest consumers of these services, are diminishing the Yen's value by spending extensive hours on platforms like YouTube Premium, Amazon Prime, Instagram, X, and Line. A report by Nikkei reveals that Japan is importing more digital services than it exports, contributing to a long-term decline in Yen's value.
Digital deficit impacts service trade balance
The digital deficit comprises costs like digital advertising fees and royalties for streaming overseas content, significantly impacting Japan's service trade balance. In 2023, the deficit touched 5.5 trillion Yen ($34 billion), surpassing the overall services deficit of 2.9 trillion Yen. Kazuma Kishikawa, an economist at the Daiwa Institute of Research, explained that a country's currency value is influenced by its trade balance.
Digital deficit exerts pressure on Japan's current account
Japanese importers often have to exchange Yen for foreign currency to pay for imported goods and services, including digital services. This ongoing digital deficit puts constant downward pressure on Japan's current account balance, because it is stable and less affected by seasonal variations. Japan's digital deficit has been widening, due to increased demand for digital services during lockdowns caused by the COVID-19 pandemic.
Foreign tech giants dominate Japan's cloud computing sector
The emergence of new technologies like generative AI and satellite technology is tipped to further widen the deficit. Most of the infrastructure for these technologies is offered by foreign companies like Amazon Web Services (AWS), Microsoft, and Google. These companies dominated 50% to 75% of Japan's cloud computing market by fiscal 2020, according to the Japan Fair Trade Commission.
Silicon Valley's global dominance impacts Japan's digital market
Kenji Kushida, a Senior Fellow at the Carnegie Endowment for International Peace, noted that this is not only a Japanese issue but rather the global dominance of Silicon Valley platforms. Such platforms had significant advantages in business models and venture capital investments, fueling their growth. In contrast, Japan's early digital platforms, developed by domestic telecom carriers, did not expand globally.
Japan's rigid labor market slows digital services adaptation
Japan's rigid labor market hinders its ability to quickly adapt to digital services, which need rapid hiring of skilled employees. Despite these challenges, Kushida is optimistic about Japan's start-up ecosystem, which has improved significantly in recent years. He believes Japanese companies need more support to export their services.
