Recently, I’ve been looking at the 20-year trend chart of the Japanese yen and realized how dramatic the process has been for the yen to transform from a safe haven into a historically depreciated currency.

Speaking of which, 2012 was still the peak moment for the yen, with 80 yen per US dollar. But then it started to decline steadily, and by 2024, it had depreciated to around 160, hitting a 32-year low. What exactly happened over these more than ten years?

First, let’s talk about the 2011 Great East Japan Earthquake. That disaster dealt a huge blow to Japan’s economy, and coupled with the radiation panic caused by the Fukushima nuclear plant explosion, Japan was forced to buy large amounts of US dollars to purchase oil. Foreign exchange income also decreased due to setbacks in tourism and agricultural exports, and that’s how the yen started to weaken.

The real turning point accelerating the depreciation was at the end of 2012 when Shinzo Abe came to power and launched Abenomics. In April 2013, the Bank of Japan announced an unprecedented large-scale asset purchase program. After Haruhiko Kuroda took office, he stated that all possible measures would be taken, including buying bonds and ETFs, injecting the market with the equivalent of $1.4 trillion in currency within two years. As a result, although the stock market responded positively, the yen depreciated nearly 30% over those two years.

By 2021, the Federal Reserve began tightening monetary policy, while the Bank of Japan still maintained ultra-low interest rates. This created a huge interest rate differential, attracting investors to borrow yen to buy dollar assets, known as arbitrage trading. When the global economy improved, the pressure for the yen to depreciate was especially strong.

In 2023, the situation started to change. The new Bank of Japan governor, Kazuo Ueda, hinted at possible policy changes, and with Japan’s inflation rate rising above 3.3%, reaching a high not seen since the 1970s, markets began to expect Japan would follow suit and raise interest rates.

By 2024, the Bank of Japan indeed raised rates twice in March and July, bringing the policy rate to 0.25%. But this also triggered intense volatility in the yen exchange rate. The yen depreciated throughout the first half of the year, rebounded somewhat after the rate hikes in July, but after the central bank kept rates unchanged in December, the yen fell below 155 again.

July 2024 can be considered the darkest moment for the yen, with the exchange rate once plunging past 161 yen per dollar, the most severe depreciation in nearly 30 years. The main reason is that the monetary policies of the US and Japan are completely opposite. The US has been aggressively raising rates since 2022 to combat the most severe inflation in 40 years, with rates exceeding 5%. Meanwhile, the Bank of Japan continues to keep rates near zero to stimulate the economy. Under these circumstances, investors naturally sell low-yielding yen to buy high-yield dollar assets. The surge in global energy prices caused by the Russia-Ukraine war also played a role; as a resource-importing country, Japan’s trade deficit continued to widen, further accelerating yen depreciation.

Interestingly, 2016 was the strongest year for the yen. Early that year, the Bank of Japan announced negative interest rates, which was interpreted by the market as a sign of global economic weakness, triggering risk aversion and capital flowing into the yen. At the same time, US rate hikes slowed, and the dollar weakened. The real surge in the yen to the 100-101 range was driven by the Brexit referendum in June, which caused panic in global financial markets, prompting investors to flock to the traditional safe-haven currency.

By 2025, the yen-to-dollar exchange rate experienced a V-shaped reversal, with particularly volatile swings. Early in the year, the yen rebounded strongly, with USD/JPY falling from around 158 to about 140. This was because the Bank of Japan raised its policy rate to 0.5% in January, reaching a 17-year high, and also revised up inflation forecasts, prompting markets to anticipate rate hikes ahead of time. Meanwhile, the Federal Reserve started cutting rates, and US interest rates fell, narrowing the US-Japan interest rate gap.

However, after the second quarter, the situation reversed. USD/JPY rebounded over 12-13% from its lows, returning to the 155-158 range by the end of the year. Several factors contributed to this reversal: although the nominal interest rate differential shrank, the real interest differential remained negative, as Japan still maintained negative rates, so investors preferred borrowing yen to buy dollar assets. Additionally, Prime Minister Sanae Takaichi continued Abe’s expansive economic policies, raising concerns about Japan’s fiscal health. Even though the Bank of Japan raised rates to 0.75% in December—its highest since 1995—markets saw this as contradictory. Trump’s tariffs, tax cuts, and fiscal expansion policies were interpreted as inflationary drivers, supporting the US dollar index.

The deeper structural issues behind the yen’s weakness are Japan’s own systemic problems: high debt levels, low growth, aging population, heavy reliance on energy imports, and policy inconsistency, all leading to long-term bearish sentiment on the yen.

Looking at the 20-year exchange rate trend of the yen, it essentially reflects the evolution of the Bank of Japan’s policies. Currently, the yen is at a historic low. From an investment perspective, some opportunities have emerged, but forex trading carries significant risks, requiring cautious strategy formulation and risk management. The future direction of the yen will largely depend on the monetary policy choices of the US and Japanese central banks and changes in economic fundamentals.