Recently, I reviewed the more than ten-year history of the yen's movement and realized how this once safe-haven paradise gradually depreciated to a record low. From 80 yen per US dollar in 2012 to over 160 in 2024, this process actually reflects deep changes in Japan's economy and global monetary policies.

Speaking of the turning point for the yen, the 2011 earthquake was a significant watershed. The earthquake, tsunami, and nuclear power plant accident caused Japan to need large imports of oil and resources, while foreign exchange income declined due to disruptions in tourism and agricultural exports, leading the yen to weaken. Afterwards, Prime Minister Abe launched "Abenomics," and in 2013, the Bank of Japan implemented unprecedented large-scale easing policies, injecting the equivalent of $1.4 trillion over two years, which directly caused the yen to depreciate nearly 30% within that period.

Interestingly, the yen actually rebounded once in 2016, rising to around 100-101. At that time, global economic weakness, Brexit fears triggering risk aversion, and the slowdown in U.S. interest rate hikes led capital to flow heavily into the yen, a traditional safe-haven currency. But this was only a fleeting phenomenon.

The real turning point in the yen's trend occurred after 2021. The Federal Reserve began tightening monetary policy, while the Bank of Japan persisted with ultra-loose policies, creating a huge interest rate differential. Investors started borrowing large amounts of yen to buy U.S. dollar assets, profiting from the interest rate spread, which increased downward pressure on the yen. By July 2024, the yen had once again depreciated to around 161-162, the lowest in nearly 30 years.

The core reason for this depreciation is clear: to combat the most severe inflation in 40 years, the U.S. started aggressively raising interest rates above 5% from 2022. Although the Bank of Japan began adjusting policies in 2024, it was too late. The interest rate differential widened to extremes, and large-scale arbitrage trading pushed the yen sharply lower. Coupled with the Russia-Ukraine war causing energy prices to soar, and Japan's status as a resource-importing country with a widening trade deficit, these factors further accelerated the yen's decline.

Entering 2025, the yen's trend experienced a dramatic V-shaped reversal. Early in the year, the Bank of Japan raised interest rates to 0.5%, a 17-year high, while the Fed began cutting rates, narrowing the U.S.-Japan interest rate gap. The yen temporarily rebounded from around 158 to about 140. But this appreciation was essentially a short-term fluctuation caused by policy convergence, not a sign of Japan's economic fundamentals truly improving.

After the second quarter, the situation reversed again. Although nominal interest rate differentials narrowed, Japan still maintained negative interest rates, and investors preferred borrowing low-interest yen to buy higher-yielding U.S. dollar assets. Plus, the new prime minister continued expansive fiscal policies, raising concerns about Japan's fiscal health. Even when the BOJ raised rates to 0.75% in December—its highest since 1995—the market saw this as a contradictory move of stepping on the accelerator and brake simultaneously. Meanwhile, expectations of policies from Trump increased U.S. inflation expectations, strengthening the dollar index.

Ultimately, the long-term weakness of the yen reflects Japan’s larger structural challenges: high debt levels, low growth, aging population, heavy reliance on energy imports, and inconsistent policy steps. These factors have led the market to maintain a long-term bearish outlook on the yen.

Looking at the changes in the yen's trend over these more than ten years, you can see how powerful monetary policy is. The policy choices of the BOJ and Fed directly determine exchange rate directions, while economic fundamentals influence long-term trends. Currently, the yen is at a historic low, which may present opportunities for some investors, but it’s also important to recognize the underlying risks. The future movement of the yen largely depends on the policy paths of both central banks and the evolution of the global economic situation.