A weaker currency is often expected to make a country’s exports more competitive and encourage production at home. New research on Japanese multinational companies shows why the result can be different when businesses already manufacture and sell through subsidiaries abroad.
The Federal Reserve posted the discussion paper on 4 September 2026. Its authors studied the sharp depreciation of the yen in 2021 and 2022 using linked information on Japanese parent companies and their foreign affiliates.
A foreign affiliate is a company operating in another country in which the parent business owns a stake. The researchers built their 2020 baseline sample by linking official company surveys from Japan’s Ministry of Economy, Trade and Industry. It connected 2,210 Japanese parent companies with 10,776 affiliates across 102 host countries. About 62% of the parents were manufacturers.
The paper is preliminary research by economists at Seoul National University, Hosei University, the Federal Reserve Board and the Federal Reserve Bank of Atlanta. Its conclusions do not represent an official position of the Federal Reserve.
How a weaker currency is expected to work
When a currency loses value, goods priced in that currency can become cheaper for buyers using stronger currencies. Foreign demand may rise, giving domestic factories a reason to produce and export more.
That familiar explanation assumes the company serves foreign customers mainly by shipping goods from its home country. Many multinationals work differently. They own factories, sales companies and other subsidiaries in the markets they serve.
In the Japanese sample, foreign affiliates earned an average of about two-thirds of their revenue in their local host markets. Sales back to Japan accounted for only 17%. Much of their business was already taking place outside Japan before the yen fell.
Currency depreciation can affect such a company in two ways. Exported goods may become more competitive, but profits earned by an overseas subsidiary also become worth more when converted into the parent company’s currency.
What changed inside Japanese multinationals
The researchers compared companies according to the currencies and foreign markets to which their existing affiliate networks were exposed. Affiliates with greater revenue exposure to the weaker yen recorded higher activity and profits. They also made larger payments to their Japanese parents.
The response was visible in employment. More exposed affiliates increased their workforces and received more workers dispatched from Japan. At the Japanese parents, average wages rose and employment shifted towards commercial branches and offices handling functions such as sales and purchasing.
Total employment at the parent companies remained broadly flat. Employment outside those commercial functions declined, and the researchers found no matching broad increase in domestic production.
The pattern helps explain Japan’s experience during the currency movement. Its trade balance deteriorated while income from overseas investments increased. The direct-investment income surplus rose from about 2% of gross domestic product in 2020 to about 4% in 2022, according to the paper.
The Bank of Japan’s review of the 2022 balance of payments also found that direct-investment income receipts increased. Investments in mining in Oceania and manufacturing in Asia made the largest contributions to the rise.
Profits can return without production returning
Direct-investment income includes earnings that residents receive through ownership of businesses abroad. It can include distributed profits, reinvested earnings and interest on loans between related companies. It is recorded separately from exports and imports in a country’s current account.
The current account is a broad record of transactions with the rest of the world. Trade in goods and services is part of it, alongside income from investments and certain transfers.
In our recent coverage of G20 trade, we reported that merchandise imports and services trade strengthened in the second quarter of 2026. The new research shows why trade figures alone do not capture every way in which companies earn money abroad.
The authors built an economic model to separate the automatic currency-conversion effect from changes in company behaviour. In their baseline simulation, a 10% real depreciation increased the direct-investment income balance by 0.51 percentage points of GDP on impact. About 0.27 percentage points came from translating existing foreign earnings into the weaker home currency. The remainder came from changes in multinational activity inside the model.
Those are modelled results, not a direct measurement of what a 10% depreciation will do in every economy. The outcome also depends on why a currency weakened and what is happening to demand in the countries where the affiliates operate.
How far the finding can travel
The main company-level evidence concerns Japan during an unusual period that included the pandemic recovery, supply disruptions and higher energy-import costs. The research design compares firms with different pre-existing foreign networks, which helps separate exchange-rate exposure from developments affecting every Japanese company. It cannot remove every possible influence.
The authors also examined 70 economies between 2014 and 2024. Countries with greater depreciation exposure through their outward investment networks tended to receive more direct-investment income and record weaker domestic GDP growth. The paper describes this international evidence as suggestive, not causal, because companies do not choose affiliate locations at random and exchange rates respond to many economic forces.
The results still identify a limitation in the usual export story. A weaker currency may help a domestically owned company while much of the additional activity occurs at plants it owns overseas. For governments expecting depreciation to revive production at home, the location of a company’s factories may matter as much as the location of its headquarters.
