Recently paying attention to the yen exchange rate trend, I found some interesting phenomena worth discussing.

The yen has indeed depreciated quite sharply this round. From the beginning of this year to now, USD/JPY has been bouncing between 152 and 160, and recently even approached the 160 mark. The effective exchange rate has hit a nearly 53-year low, which is no coincidence. Behind this are actually several structural issues stacking up: the continued widening of the US-Japan interest rate differential, the Bank of Japan’s slow pace of rate hikes, government fiscal pressures, plus the prevalence of global arbitrage trading.

Speaking of the Bank of Japan, they have been playing a balancing act in recent months. The April meeting ultimately decided to hold steady, maintaining the policy rate at 0.75%. The market initially expected a rate hike, but the uncertainty from the Middle East situation disrupted that rhythm. However, BOJ Governor Ueda Kazuo’s comments suggest that if the economy and inflation develop as expected, further rate hikes are still on the table. The focus now shifts to the June meeting, where the market’s probability of a rate increase has risen to 76%.

Why has the yen been falling? I’ve summarized a few main reasons. First is the interest rate differential issue: Japanese rates are still far below U.S. rates, leading investors to borrow low-yield yen to invest in high-yield dollar assets, and this arbitrage selling pressure has persisted. Second is Japan’s relatively weak economic fundamentals: sluggish consumption, import-driven inflation pushing up prices, and the BOJ’s cautious stance on rate hikes. Additionally, the Middle East situation impacts Japan heavily reliant on Middle Eastern oil imports, with risks in the Hormuz Strait increasing import costs. Another factor is the relatively resilient U.S. economy and a strong dollar index, making the yen, as a low-yield currency, more susceptible to sell-offs in risk-on environments.

Regarding the forecast for the yen exchange rate, opinions among market institutions still vary. JPMorgan is more pessimistic, expecting the yen to fall to 164 by the end of this year. Societe Generale’s prediction is also not optimistic, expecting it to dip to 160 by year-end. Their common logic is: the global macro environment still favors risk sentiment, arbitrage trading demand persists, the BOJ remains cautious, and the Fed might be more hawkish than expected, so USD/JPY will stay at high levels.

In the short term, USD/JPY is likely to test between 152 and 158. If it really drops to 160, the likelihood of Japanese authorities intervening increases, but such measures usually only buy time. The turning point may be the June BOJ meeting. A Reuters survey shows that nearly two-thirds of economists expect the BOJ to raise rates to 1.0% before the end of June, which could narrow the US-Japan interest rate gap and boost the yen’s attractiveness.

Long-term, the key to the yen’s exchange rate trend still lies in Japan’s internal structural reforms. Only when economic growth momentum significantly improves, wages and prices form a healthy cycle, can the yen truly stabilize. Currently, Japan’s inflation rate remains relatively low among the G7, and economic growth is stable, but these are still insufficient to change the status quo.

My own view is that the yen will still face pressure in the short term, but if the June rate hike by the BOJ actually happens, coupled with changes in global risk sentiment, the yen’s trend could turn around. For friends considering buying yen, a phased approach might be wise to meet future needs. If trading in the forex market, it’s still necessary to judge based on your risk tolerance, and consult professionals if needed.