“Escaping deflation” has become a key word for Japan. One scenario has been to allow the yen to weaken, spurring price increases and expanding nominal GDP while escaping deflation. Escaping deflation will allow companies to pass on price increases to sales prices, which will lead to increased sales and higher wages.

This is considered a standard scenario and blueprint for escaping deflation, but does it really work with Japan’s current economic structure? Is it possible that this standard is already outdated and no longer usable?

I also have doubts about the structure in which stock prices rise when the yen weakens and fall when the yen strengthens. I looked into the past out of curiosity, and found that there were many times when stock prices rose even when the yen strengthened. Conversely, there were times when stock prices fell when the yen weakened.

When I read “The True Nature of the Weak Yen: Japan, the Masked Surplus Nation” (by Karakama Daisuke, Nikkei Premier Series), market participants believe that since the launch of the new NISA, investment in foreign stocks by Japanese individual investors has accelerated, which has spurred the weakening of the yen. Japanese people investing in foreign stocks is the same as Japanese people selling yen.
Because they are selling yen and buying stocks, the yen weakens. If more Japanese people buy stocks, not only foreign stocks but Japanese stocks will rise as well. That’s all there is to it, and it doesn’t seem to have anything to do with escaping deflation.
Even if prices rise due to a weak yen, if there is less money in the country and consumption falls, sales will not increase and wages will not rise. If this structure is correct, even if the Bank of Japan raises interest rates, the yen will not strengthen so easily.
If the current weak yen is caused by money flowing out of the country, prices will rise and GDP will expand, but wages will not rise, and the purchasing power of many people will decline relatively. In other words, they will become impoverished.
If this is the case, the theory that has been pointed out until now that “deflation causes wages to fall at a rate greater than the fall in prices, so the people will become impoverished” does not hold up. (Kei Kitajima)

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