Core Viewpoint - The traditional conclusion that a narrowing interest rate differential leads to yen appreciation has become invalid, as the yen remains depreciated despite a decrease in the US-Japan interest rate gap to its lowest level in three years [4][5]. Group 1: Interest Rate Dynamics - The US has been lowering interest rates while Japan is expected to raise them, with a 95% probability of a rate hike in December [5]. - The actual interest rate differential has shrunk to its lowest level in two and a half years, yet the yen's exchange rate remains around 155 yen per dollar, similar to the beginning of the year [5][8]. Group 2: Structural Economic Factors - Japan's economy faces deep-rooted structural issues, contributing to the persistent depreciation of the yen [6]. - The current account surplus for Japan from January to October reached 27.6 trillion yen, with expectations of setting a new historical high for the year [8]. - Japan has experienced trade deficits for four consecutive years, with a deficit of 1.5 trillion yen recorded by October 2025, primarily due to dollar-denominated imports [8]. Group 3: Service Balance and Future Projections - The service balance shows a significant deficit of 5.6 trillion yen, while tourism income has generated a surplus of 5.4 trillion yen, indicating a precarious balance [8]. - Projections suggest that by 2035, the digital deficit could reach 18 trillion yen, surpassing the cost of oil imports [8]. - The chief market economist at Mizuho Bank predicts that 2026 may mark a turning point for Japan's service deficit [9]. Group 4: Investment Trends and Economic Policies - The introduction of Japan's NISA investment scheme has led to increased capital outflows, with an average of 690 billion yen per month since its implementation, significantly higher than previous levels [11]. - Concerns about the effectiveness of fiscal stimulus policies and their potential impact on the yen's credibility are rising, as evidenced by the highest CDS margin ratio in two years [11]. - The Japanese government has passed a supplementary budget for 2025 that is the highest since the COVID-19 pandemic, raising concerns about fiscal expansion [11].