Yen depreciation lifts foreign affiliate profits over domestic output
Currency depreciation raises foreign affiliate profits and cross-border investment income rather than stimulating domestic factory production, according to Federal Reserve research. Matched Japanese firm data from 2020 to 2022 reveal parent companies shifted support resources abroad.
Commercial labor shifts overseas
During the 2021–22 yen depreciation, Japanese foreign affiliates with higher currency exposure expanded operations and profits, generating larger financial payments to domestic parents.
Moving an affiliate from the 10th to the 90th percentile of revenue exposure lifted current profit by 19.3 percent and parent transfers by 14.7 percent, while affiliate employment rose 4.0 percent.
Japanese parent firms did not expand domestic factory floors.
Instead, exposed parents increased average wages by 4.2 percent and non-production commercial support employment by 9.3 percent, while domestic production employment fell by 7.0 percent and fixed assets dropped 4.9 percent.
Overall parent headcount remained flat as operational resources moved to foreign units.
From trade surplus to direct investment
In a general equilibrium model, a 10 percent real depreciation raises the direct investment income balance by 0.51 percentage points of GDP on impact, nearly double the 0.27 percentage point mechanical valuation effect.
Endogenous affiliate growth accounts for the remainder.
As foreign production replaces exports, external adjustment shifts from trade balances toward direct investment income.
Panel data covering 70 economies from 2014 to 2024 confirm that currency depreciation through outward foreign direct investment raises foreign income credits while curbing domestic real GDP growth.
FDI breaks the devaluation playbook
Currency depreciation no longer sparks a domestic factory boom in multinational economies.
Scarce corporate resources flow to profitable foreign affiliates rather than domestic assembly lines.
Central banks must recognize that weaker exchange rates pad corporate income abroad while bypassing local workers.