Recently, there's an interesting phenomenon. Many people are discussing the depreciation of the Japanese yen, especially for those who enjoy traveling to Japan; this is practically great news. But have you ever thought about what exactly causes the yen to depreciate? Why is it that the yen, once considered a safe-haven currency, is becoming less and less valuable?

Let me first give you an overview of the basic situation of the yen. The yen is Japan's legal currency, issued and managed by the Bank of Japan, symbolized as ¥, with the code JPY. The modernization of this currency system can be traced back to the Meiji Restoration in 1871, when Japan established a new monetary system based on the gold standard. After various evolutions through the gold standard, silver standard, and the Bretton Woods system, the current floating exchange rate system was established in 1973. Honestly, this history is quite complex, but the core is that the yen has become the world's third-largest reserve currency, after the US dollar and the euro.

So, what is the core reason behind the yen's depreciation? I’ve summarized a few key factors. First is the ultra-loose monetary policy of the Bank of Japan. Over the years, Japan has been implementing quantitative and qualitative easing, and has introduced yield curve control policies aimed at keeping long-term interest rates very low. The result of this is that liquidity in the market is extremely abundant, but the attractiveness of the yen has actually decreased.

More importantly, the interest rate differential between Japan and the US. The Bank of Japan maintains negative interest rates, while the Federal Reserve has been aggressively raising interest rates since 2022, with a total increase of 375 basis points. Think about it: borrowing yen in Japan costs almost nothing, and by converting it into US dollars or other high-yield currencies to invest, the potential for earning high interest is huge. This temptation is enormous. As a result, large amounts of capital flow out of Japan, causing the yen to depreciate naturally. This logic is quite simple but very powerful.

At this point, I have to mention an interesting group called "Watanabe Mrs." This is a nickname given by the international financial market to Japanese retail investors, mainly housewives seeking high returns. They borrow low-interest yen and exchange it for dollars or other high-yield currencies to invest. This carry trade strategy is especially popular in Japan. How significant is this group? When the Japanese government tried to intervene in the forex market in October 2022, the yen temporarily rebounded, but soon fell again. The market generally believes this was caused by these retail investors quickly closing their positions.

From the perspective of market expectations, the depreciation of the yen has also formed a self-fulfilling cycle. When speculators generally expect the yen to weaken, this expectation itself will reinforce the depreciation trend. You can see market sentiment from the CFTC's yen futures data, where the net positions are consistently negative, indicating that everyone is betting on the yen continuing to fall.

However, there is an interesting turning point. At the end of 2022, the Bank of Japan suddenly announced an expansion of the yield fluctuation range from ±0.25% to ±0.5%. This move may seem minor, but the market immediately interpreted it as the central bank preparing to reduce easing. Once Japan’s policy adjusts, the interest rate differential between Japan and the US could narrow, and the large amount of Japanese capital flowing overseas might flow back, providing support for the yen exchange rate.

Why still hold yen? The most direct reason is travel. A depreciating yen means your costs in Japan are significantly reduced, and you can buy more with the same amount of money. For example, if a product is priced at 10,000 yen, and the exchange rate improves from 0.23 to 0.45, your purchase cost can be saved by nearly 49%. Besides travel, Japan’s financial markets also offer various investment options such as stocks, bonds, and real estate. Holding yen is a prerequisite for directly investing in Japanese assets.

Regarding the yen’s safe-haven attribute, I must honestly say that this idea is no longer very valid under certain conditions. The yen has been regarded as a safe-haven currency mainly because Japan is the world’s largest creditor country, holding vast overseas net assets, which theoretically can attract capital inflows during times of risk. Plus, its low-interest environment makes it a primary funding currency for carry trades. When markets panic, investors need to unwind these trades, buy yen to repay debts, which can also boost demand for the yen. But the market performance from 2022 to 2023 clearly shows that when policies are extremely divergent and trade imbalances are severe, the yen’s safe-haven function can completely fail, and the exchange rate can decline unilaterally.

Ultimately, understanding the reasons for the yen’s depreciation is a microcosm of modern financial markets. The yen’s fluctuations reflect the Bank of Japan’s policy stance, changes in international interest rate differentials, and market participants’ behavioral expectations. These factors intertwine to determine the yen’s trend. For ordinary people, whether planning a trip to Japan or considering investing in Japanese assets, understanding these logics can help you make smarter decisions.