In the land of the rising sun, international streaming services like Netflix have won the hearts of Japanese consumers. However, this affection for digital entertainment is exerting downward pressure on the yen, according to a recent analysis by Barclays.
The soaring popularity of overseas entertainment platforms, from video to music streaming, was a crucial factor behind Japan recording its most significant services account deficit in two decades in 2022. The “digital deficit,” as it’s coined, reached an astounding 4.8 trillion yen ($34.6 billion), constituting 89% of last year’s 5.4 trillion yen services account deficit.
Barclays FX strategists Lhamsuren Sharavdemberel and Shinichiro Kadota highlight that this deficit underscores a structural shift in both consumer and business behavior, which suggests that the trend isn’t just a passing phase. This translates into increasing yen-selling pressure, a predicament for the Japanese currency.
The yen has already been on a downward slide against the US dollar in 2023, losing 5% of its value. This drop followed a low in 2022 when the yen plummeted to a 30-year nadir against the greenback, fueled mainly by the Federal Reserve’s aggressive interest rate hikes in contrast to the Bank of Japan’s decision to maintain low rates.
The pandemic-induced lockdowns sparked a surge in demand for Netflix, Amazon’s Prime Video, Disney+, and other streaming platforms, a trend that remained on an upward trajectory into 2022. American subscription video-on-demand (SVOD) platforms dominate the Japanese market, holding about 62% of the market share, significantly surpassing the 38% stake held by Japanese companies.
As forecasts suggest, the subscription VOD market in Japan could potentially expand to 749 billion yen by 2027. This prediction indicates payments to foreign companies are likely to swell, even if current market shares remain static.
Apart from the shift towards streaming platforms, the transition by Japanese consumers from purchasing physical albums and books to downloading music and books digitally also contributes to the burgeoning digital deficit.
However, there could be some relief in sight. Barclays’ strategists suggest that a swift rebound in tourism to Japan may help narrow the services account deficit by 1.8 trillion yen this year.
They also predict a potential further drop in the yen to 123 by the first quarter of 2024, partly if the Bank of Japan modifies its yield-curve controls, another factor currently pressuring the yen. This situation provides food for thought for investors and entrepreneurs observing Japan’s dynamic digital landscape and its impact on the country’s economy.