Japan's Yen Undervaluation and Steps to Reverse Outflows

By Makiko Yamazaki and Yoshifumi Takemoto

TOKYO (Reuters) - Japan's economic fundamentals suggest the yen's real value is closer to 120-130 per dollar rather than the current 150 levels, senior lawmaker told Reuters, as the ruling party considers steps to help reverse capital outflows.

"I believe 120 to 130 levels to the dollar are seen as the value reflecting Japan's economic strength," Satsuki Katayama, who chairs the ruling Liberal Democratic Party's (LDP) research commission on the finance and banking systems, said in an interview on Tuesday.

She declined to comment specifically where she believes the yen should trade.

The Japanese currency fell past 150 to the dollar this week on solid U.S. data, cautious optimism on U.S. tariff policies and expectations that the Bank of Japan will go slow on monetary tightening.

A weak yen has been a headache for Japanese policymakers because it accelerates inflation by pushing up import costs, weighing on consumption.

Katayama said U.S. President Donald Trump's administration also does not want excessive yen weakness versus the dollar, but noted there are limits to what monetary policies of both countries can do to change the tide.

"While currency interventions could serve as a trigger (for currency moves), their long-term impact tends to be limited, so we need measures that fundamentally address the issue," Katayama said.

For example, the LDP is set to propose an expansion in a tax-free investment programme to encourage individual investors to own domestic stocks, she said. This could help stem the flow of household funds overseas, in turn supporting the yen.

Specifically, holdings of domestic stocks held by elderly investors for an extended period of time under the programme should be exempt from inheritance tax when they are succeeded by younger generations, Katayama said.

The Nippon Individual Savings Account (NISA) programme, which exempts retail investors from paying capital gains taxes on stock holdings, expanded significantly in 2024.

But high-yielding overseas stocks have dominated the popular investment product rankings so far, which analysts see as one factor behind the yen's persistent weakness.

"We want to create benefits for long-term investors in domestic stocks," Katayama said, adding that the LDP aims to include those measures in the government's annual policy guidelines for budget planning to be released around June.

(Reporting by Makiko Yamazaki and Yoshifumi Takemoto; Editing by Sam Holmes)