Recently, the yen exchange rate has been quite miserable. The USD/JPY has been fluctuating between 152 and 160, and it’s about to hit the 160 mark. The yen’s record low continues to persist. I checked, and the effective exchange rate has already fallen to its lowest point in nearly 53 years, indicating that this wave of depreciation is indeed quite strong.

Why is this happening? Mainly due to several structural factors stacking up. First, the interest rate differential between the US and Japan has always existed. The Bank of Japan’s rate hikes are not keeping pace with the US, leading to frequent arbitrage trades—everyone borrows yen to invest in dollar assets, creating significant selling pressure. Second, the Japanese government’s fiscal expansion and increased bond issuance have raised concerns about rising risk premiums. Additionally, the instability in the Middle East and high oil prices have increased Japan’s import costs, widening the trade deficit. The US economy remains relatively stable, and the dollar stays strong, making the yen, as a low-yield currency, more prone to sell-offs.

The Bank of Japan is also in a bit of a dilemma. They expected to raise interest rates in April, but the Middle East conflict disrupted that plan. BOJ Governor Ueda Kazuo explicitly pointed out that the uncertain situation continues to cause turbulence in financial markets. So, the April meeting kept rates unchanged, maintaining the baseline rate at 0.75%. However, they hinted in their quarterly report that there might be a rate hike in June or July. Currently, the market’s expectation for a June rate hike has risen to about 76%.

Looking ahead, I think the key depends on whether the US-Japan interest rate differential can truly narrow. If the Federal Reserve accelerates rate cuts, rapidly shrinking the spread would be favorable for the yen. But if the Fed’s rate cuts are slow or the US economy remains resilient, the dollar could continue to stay strong, limiting the yen’s rebound potential. Global risk sentiment is also very important—since the yen is a low-interest currency, when risk appetite is high, it’s often borrowed out to invest in high-yield assets, creating selling pressure. If the stock market corrects, unwinding arbitrage trades could also drive a rapid appreciation of the yen.

What do institutions think? JPMorgan’s head of FX strategy in Japan predicts the yen could fall to 164 by the end of the year. Meanwhile, the FX strategist for BNP Paribas in Emerging Asia expects the yen to dip to 160 by year-end. Their common view is that, next year, the global macro environment will be relatively favorable for risk sentiment, which will support continued arbitrage trading. Considering the cautious stance of the Bank of Japan and the possibility that the Fed may be more hawkish than expected, USD/JPY is expected to stay in a high range.

However, in the long term, the yen will ultimately depend on internal structural reforms in Japan. Only when economic growth momentum significantly improves, and a healthy cycle of wages and prices is established, can the yen’s strength be truly sustained. In the short term, it may weaken further for a while, but this also presents an opportunity for those with travel and consumption needs to buy in. If you want to profit from forex trading, it’s best to do your homework based on your risk tolerance and consult professional advice.