The U.S. dollar’s recent appreciation against the yen is gradually strengthening. If you listen to the pundits, the U.S. Federal Reserve—the U.S. counterpart to the Bank of Japan—will find lowering interest rates challenging for the foreseeable future, as the U.S. economy is seen outperforming expectations, resulting in interest rates remaining high for some time. Meanwhile, many in Japan believe that the country will not immediately be able to rescind its zero-interest-rate policy. As a result, there will continue to be a considerable interest rate gap between Japan and the U.S. Given this, it seems that the relative relationship between the two currencies will not change anytime soon, with the dollar remaining strong and the yen weak. This reminds me of the recent news that Sumitomo Mitsui Banking Corporation has raised the interest rate on its dollar-denominated time deposits to 5.3%. With a near-zero interest rate on one-year time deposits in Japanese yen, this news may have triggered an avalanche of people moving their assets to dollar-denominated time deposits. And it is highly likely that other banks will follow suit, given the influence of the megabanks in Japan. Further, while the risk exists in foreign exchange that the value could be diminished (in yen terms) if the yen appreciates, if the appreciation remains within the range of the interest rate, investors won’t incur losses. Thus, the volume of yen-to-dollar conversions will increase, which may also contribute to a further widening of the relative value gap between the two currencies.

While this story is a currency forecast focusing on the differential in interest rates between the two countries, it appears that the exchange rate can also be influenced by other, longer-term factors. In the U.S., the population keeps growing, as does the economy, at a moderate pace—and this growth is seen continuing—and, regardless of how sound public finances may be, fiscal policy remains relatively circumspect. The U.S. is a country at the forefront of technological innovation with a robust industrial base. Japan, on the other hand, is a country with a declining and aging population that has contributed to sustained low growth, lacks fiscal stability and discipline, and faces an uncertain future with an industrial base centered on the manufacturing sector. When viewed from this macro perspective and long-term time horizon, it becomes apparent that there is no significant change in sight in the relative relationship between the yen and the dollar.

Naturally, my aim here is not to predict the exchange rate. I just want to say that I always wonder what kind of significant, long-term trends we’re looking at, and I think this is very important. My main concern has been the megatrends that will most notably impact society overall.

About a quarter-century ago, the Internet was viewed as a megatrend that would continue to develop and change the way society disseminates and exchanges information. We weighed the potential of the publishing business against the possibilities of the Internet, and we chose the latter. Obviously, there’s no way anyone saw smartphones becoming as immensely popular and commonplace as they have; that they would indeed become indispensable. Put another way, no one could foresee the details of the change, but the broad terms—that the Internet would significantly alter the way information is communicated in society—was, in fact, true.

Let’s look at business succession.

The decline in birthrates, changes in family relationships and structures, and the broader acceptance of individual freedom of thought will result in challenges related to succession. This is another megatrend in Japanese society: Demand for M&A, in which businesses are taken over by others, was rather low two decades ago. However, changes in society have dramatically altered this landscape, and the M&A brokerage business has taken a big leap forward. In recent years, many companies engaged in this area of business have gone public, and while they are fulfilling a need born of societal change, they are also generating significant revenues.

Then there’s insurance.

Family relationships and structures are undergoing change due to the aging of the population and the falling birthrate. Amidst such conditions, there is a parallel diversification in people’s lifestyles and the risks in their lives. This has sparked the creation of a variety of new insurance policies. Insurance companies have also diversified their sales channels to reach consumers with increasingly segmented needs properly. In the past, sales were exclusively performed by insurance company sales staff or knowledgeable financial planners. Today, pull-type insurance stores, not push-type, have become commonplace as sales channels. Twenty years ago, this form of sales hardly existed because at that time, no one thought it would be an effective means of selling insurance. Now in Japan, we see insurance stores in downtown areas in front of train stations, and they have also become a fixture at shopping centers in the suburbs.

There is no doubt that society continues to age. As this progresses, what changes will it engender in society, and what new needs will emerge or grow enormously as a result? This is a question that is constantly on our minds. Needs are extremely diverse, encompassing financial matters such as inheritance, insurance, and real estate, physical issues like medical and nursing care, and emotional matters including funerals and graves. I think it’s clear that, as with business succession and insurance, a major new channel will emerge to address these growing challenges. And I’m confident we can certainly provide new value in response to this huge latent demand.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.