As the yen continues to weaken, Japan is gradually evolving into a low-cost hub among major global economies. Latest city living cost rankings from international financial institutions show Tokyo has joined the ranks of the cheapest major cities globally. Data shows local three-bedroom apartment rent is only a quarter of New York's, and the purchase cost for some consumer electronics is also among the lowest globally. Against the backdrop of potential repatriation of trillions of dollars in overseas assets held by Japanese institutions, the market is debating whether the yen's weak pattern of over a decade is nearing a turning point.

The survey covering dozens of cities across six continents points out that while Zurich and Geneva remain the most expensive cities, and New York and San Francisco are in the top five, Japan's change is the most significant. Strategists analyze that Japan is undergoing significant structural repricing, with Tokyo becoming a low-cost hub among global major cities. Besides rent, considering tax factors, Tokyo is also one of the major cities with the lowest cost to purchase smartphones. Local dining prices are even lower than some Eastern European cities, about two-thirds lower than New York or Zurich. In sharp contrast to the US becoming more expensive relative to almost all major economies, Japan has become the most prominent exception in the global cost of living landscape.

The core reason Japan has become so cheap is the obvious mismatch between yen depreciation and domestic inflation. Since 2012, the Bank of Japan has maintained ultra-low interest rates for a long time and suppressed financing costs through financial repression policies. Meanwhile, interest rates in the US and other major economies have continued to rise and normalize, widening the interest rate differential between Japan and overseas markets. In this process, the yen has depreciated by about half cumulatively, but domestic prices in Japan have only risen by about 20%. This means that when priced in foreign currencies such as the US dollar, the prices of Japanese goods, services, and real estate have dropped significantly, thereby forming the current extreme undervaluation of Japan at the purchasing power parity level.

Low interest rates and continuous depreciation have made the yen one of the most popular funding currencies for global carry trades for a long time. The so-called yen carry trade refers to investors borrowing low-interest yen and then investing the funds in currencies and assets with higher yields and relatively stronger exchange rates. Market estimates for the scale of such trades are generally between 500 billion US dollars and 1 trillion US dollars or more. As long as Japanese interest rates remain low and the yen continues to be weak, such trades remain highly attractive. However, once Japanese capital begins to return on a large scale, or the yen enters a continuous appreciation cycle, investors may be forced to unwind positions, thereby accelerating the buying back of yen and pushing for a repricing of global asset prices. Multiple research institutions believe that Japanese capital repatriation could become a key factor in changing the yen's trend.

The Japanese Minister of Finance recently signaled that the government may consider adjusting the asset allocation of public pensions to increase the proportion of investment in domestic assets. Strategists estimate that Japanese institutions currently hold about 3.4 trillion US dollars in overseas assets. If policy promotes the repatriation of a portion of these funds to Japan, the potential repatriation scale could reach 400 billion to 450 billion US dollars, equivalent to about 10% of Japan's gross domestic product. Other economists estimate more aggressively, believing that the scale of overseas assets held by Japanese institutions could reach 7 trillion US dollars, while their allocation proportion to Japanese Government Bonds is only about 25%. The Japanese government is considering including Japanese Government Bonds in more popular tax-free investment plans. If the government can maintain policy stability, it may further encourage domestic pension funds, insurance companies, and other institutional investors to increase their allocation to Japanese domestic assets. This means that capital repatriation does not necessarily require the Bank of Japan to raise interest rates significantly; merely through adjustments to pensions, tax incentives, and asset allocation rules, considerable yen buying pressure could be formed.

Besides capital repatriation, artificial intelligence could also become an important variable changing Japan's long-term economic outlook. One of the core structural challenges facing the Japanese economy is the aging population and the continuous reduction of the labor force. This not only causes labor shortages but also limits potential economic growth. Analysis suggests that AI technology capable of boosting productivity has particularly strong economic and political attraction in Japan. The Japanese government has proposed becoming one of the countries most supportive of AI development, and its developed manufacturing base, robotics industry, and industrial system also provide advantages for AI infrastructure construction and commercial applications. If AI can alleviate labor shortages, improve corporate production efficiency, and drive domestic capital expenditure, Japan's long-term economic growth and asset return rates may improve. This will increase the attractiveness of Japanese domestic assets to domestic institutions and further support capital repatriation and yen valuation repair.

Although purchasing power parity shows the yen is clearly undervalued, cheap valuation itself does not guarantee a short-term exchange rate rebound. Whether the yen can truly reverse still depends on multiple conditions, including whether the Bank of Japan continues to promote monetary policy normalization, whether the US-Japan interest rate differential can narrow, whether Japanese institutions truly adjust overseas asset allocation, and whether international investors begin to centrally unwind yen carry trades. In addition, long-term issues such as Japan's demographic structure, fiscal burden, and weak domestic demand have not disappeared. Even if capital gradually returns, the yen's repair process may also be gradual rather than a sudden unilateral appreciation. However, as the degree of yen undervaluation continues to expand, the market's sensitivity to Japanese capital repatriation is rising. Once there are clear changes in policy, interest rates, or capital flows, large-scale carry positions could amplify yen volatility.