Recently, I reviewed the exchange rate trends of the Japanese Yen over the past decade or so and found some quite interesting patterns. Starting from 2012 with Abenomics, the Yen embarked on a long depreciation journey, reaching a 32-year low in 2024. What exactly has been happening behind the scenes?

Speaking of the Yen's exchange rate changes, it all begins with the 2011 earthquake. That earthquake and tsunami caused massive damage to Japan's economy. Coupled with the Fukushima nuclear disaster, Japan had to increase dollar purchases to import oil, and foreign exchange income also declined due to radiation concerns and a drop in tourism, leading to a weakening Yen.

The real turning point was in December 2012 when Shinzo Abe took office and launched "Abenomics." Subsequently, in April 2013, the Bank of Japan announced an unprecedented large-scale easing policy, with new Governor Haruhiko Kuroda pledging to inject the equivalent of $1.4 trillion into the economy. While this policy stimulated the stock market, it also directly caused the Yen to depreciate nearly 30% over two years. Interestingly, in August 2016, the Yen briefly rebounded to the 100-101 level mainly due to risk aversion triggered by Brexit, with capital flooding into the Yen. But this was only a fleeting moment.

In September 2021, the Federal Reserve began tightening monetary policy, which further increased the Yen's depreciation pressure. Because Japan's borrowing costs are extremely low, many investors started carry trades—borrowing Yen to buy U.S. dollar assets to earn interest rate differentials. During periods of global economic growth, this arbitrage exerted significant pressure on the Yen.

By 2023, the new Bank of Japan Governor Kazuo Ueda signaled potential changes to monetary policy. At that time, Japan's CPI had already exceeded 3.3%, reaching a new high since the 1970s. Although the central bank claimed that inflation was not persistent, markets began to anticipate interest rate hikes.

2024 became a critical turning point. The Bank of Japan raised interest rates by 10 basis points in March and 15 basis points in July, bringing the policy rate to 0.25%. But this was still not enough to reverse the Yen's trend. By July, the divergence in monetary policies between the U.S. and Japan reached its peak—U.S. rates remained above 5%, while Japan was near zero, causing the Yen to briefly break below 161 against the dollar, a historic low. The surge in energy prices due to the Russia-Ukraine war, combined with Japan's trade deficit as a resource-importing country, further exacerbated Yen depreciation.

Entering 2025, the Yen experienced an interesting "V-shaped reversal." Early in the year, the Bank of Japan raised rates to 0.5%, a 17-year high, while the Federal Reserve began cutting rates, narrowing the U.S.-Japan interest rate gap. The Yen temporarily rebounded, with USD/JPY falling from 158 to around 140. But this appreciation was essentially driven by "policy convergence and narrowing interest differentials," not a genuine improvement in Japan's economic fundamentals.

In the second quarter, the situation reversed again. The USD/JPY rebounded over 12-13% from its lows, returning to the 155-158 range by year's end. The reasons include the Fed cutting rates three times throughout the year, while the Bank of Japan raised rates twice, yet Japan remained in negative interest territory. Investors still preferred borrowing low-interest Yen to buy high-yield U.S. assets. Plus, after Prime Minister Sanae Yoshida took office, continuing the "Abenomics" style of massive stimulus, market concerns about Japan's fiscal health grew. Even with the central bank raising rates to a new high of 0.75% in December, market pessimism about the Yen persisted. The "Trump inflation" expectations fueled by Trump's policies further supported the U.S. dollar index.

Deeper issues lie in Japan's structural challenges: high debt, low growth, aging population, heavy reliance on energy imports, and inconsistent policies—all contributing to a long-term bearish outlook for the Yen.

Looking back over the past decade, it’s clear that central bank policies have had profound impacts on the exchange rate, but larger forces stem from shifts in the global economic landscape. The Yen's future will largely depend on the monetary policy choices of the U.S. and Japanese central banks, as well as Japan's ability to address its structural problems. Currently at a historic low, the Yen does present some opportunities for forex trading, but such trading carries risks and requires careful strategy and risk management.