Lately, I've been watching the trend of the USD/JPY exchange rate and noticed that this wave of yen depreciation is quite intense. The USD/JPY is fluctuating between 152 and 160, approaching nearly 160 by the end of April, clearly weaker than at the beginning of the year. Looking at the real effective exchange rate, it has even hit a nearly 53-year low, and the reasons behind this are actually quite complex.

First, the interest rate differential between Japan and the U.S. has been widening. Although the Bank of Japan raised interest rates several times last year, U.S. rates are still much higher, leading to frequent arbitrage trading. Many borrow yen to invest in dollar assets, resulting in persistent yen selling pressure. Additionally, Japan’s new government’s expansionary fiscal policies—such as increased bond issuance and rising deficit concerns—have also contributed to declining confidence in the yen. Coupled with the relatively stable U.S. economy, the strong dollar policy of the Trump administration supports the dollar index, making the yen a low-yield currency that is particularly vulnerable to selling in this environment.

Another significant factor is the Middle East situation. Japan relies heavily on Middle Eastern oil imports, and the blockade of the Hormuz Strait directly threatens energy security. Persistent high oil prices increase import costs, widen the trade deficit, and negatively impact the yen. The Bank of Japan initially planned to raise interest rates in April, but due to the sudden escalation of the Middle East tensions, it may now hold steady. The next rate hike window appears to be in June, with market expectations for a June rate increase rising to 76%.

As for the possibility of yen appreciation, I think the key depends on whether the Bank of Japan can accelerate its rate hikes to narrow the U.S.-Japan interest rate gap. If the Federal Reserve cuts rates faster due to economic slowdown, or if the BOJ raises rates as scheduled in June, the yen could rebound. However, according to forecasts from major institutions, JPMorgan predicts the yen could fall to 164 by the end of the year, and Société Générale expects it to drop to around 160. Their reasoning is that global risk sentiment may remain relatively optimistic, which typically supports continued arbitrage trading.

In the long term, a true reversal of the yen’s decline still depends on internal structural reforms in Japan. Only when economic growth momentum significantly improves, and wages and prices enter a healthy cycle, can the yen establish a solid foundation for strength. In the short term, the U.S.-Japan interest rate differential may continue to widen, but I believe this wave of depreciation will eventually reach a limit—it's just a matter of when the market will see real signs of Japan’s economic improvement.