Lately, I’ve been watching the exchange rate, and I’ve found that the story of the Japanese yen is quite complicated. The USD/JPY is currently fluctuating between 152 and 160, having already approached 159 by the end of April, and the real effective exchange rate has hit a nearly 53-year low—behind this, the reasons are definitely not just about central bank policy.

When it comes to why the yen has kept depreciating, the core issue is the US-Japan interest rate differential. With US interest rates staying high and the Bank of Japan moving at a slow and sluggish pace in raising rates, large volumes of carry/arbitrage trading get drawn in—borrowing low-interest yen to invest in high-yield US dollar assets. So what happens? The yen is constantly being sold off. On top of that, Japan’s new government has rolled out large-scale fiscal stimulus, increasing government bond issuance; as market worries about fiscal risk rise, the yen comes under further downward pressure.

The situation in the Middle East has also added fuel to the fire. Japan is highly dependent on importing oil from the Middle East, and the blockade of the Hormuz Strait directly threatens energy security. Even though Japan has around 250 days of strategic oil reserves, as long as oil prices remain high, import costs will stay elevated, the trade deficit will widen, and pressure for the yen to weaken will increase.

What’s interesting is that the market has now shifted its focus to the Bank of Japan meeting in June. There had been expectations of a rate hike in April, but the Iran war disrupted those plans, and the central bank chose to stand pat, keeping the policy rate at 0.75%. But according to a Reuters survey, nearly two-thirds of economists expect a rise to 1.0% in June, and the current probability in the market for a June rate hike has already climbed to 76%. If a rate hike does happen, the US-Japan interest rate differential would narrow, which would be favorable for a yen rebound.

Judging from institutional forecasts, JPMorgan’s Japan FX strategy head Junya Tanase is the most pessimistic, believing the yen could fall to 164 by the end of this year. BNP Paribas strategist Parisha Saimbi expects the yen exchange rate to dip to 160 by year-end. Their shared view is that global risk sentiment remains relatively stable, arbitrage trading will continue, and the Federal Reserve may be more hawkish than expected—these factors are all unfavorable for the yen.

However, if you want to judge the future trend of the yen, four key factors are worth paying attention to. First is inflation measured by CPI—if inflation heats up, the central bank will raise interest rates, supporting the yen; if inflation cools, the central bank has no urgency to change its easing stance, and the yen may depreciate in the short term. Second are economic growth data such as GDP and PMI—strong data implies the central bank has more room to tighten, which is positive for the yen. Third is the Bank of Japan’s monetary policy and the comments by Governor Ueda Kazuo—these are often amplified by the market in the short term and directly affect exchange-rate fluctuations. Finally, don’t forget international market conditions—policy changes by central banks around the world will also relatively affect the yen.

To be honest, in the short term it’s still difficult for the yen to strengthen strongly. The continued widening of the US-Japan interest rate differential and the slow pace of central bank policy shifts are the two major factors keeping sustained downward pressure on the yen. But in the long run, the yen will ultimately return to its appropriate level. If you have travel needs, you can buy in batches to meet future requirements; and if you want to profit in the foreign exchange market, you still need to do your homework based on your own risk tolerance, and consult professional advice when necessary.