Recently, while organizing historical data on the Japanese yen, I discovered some quite interesting patterns. The story of the yen's depreciation over the past decade is essentially a contest between central bank policies and global economic changes.

Speaking of which, before 2012, the yen was still appreciating, but everything changed after Shinzo Abe took office. He launched the so-called "Abenomics," and the Bank of Japan followed with large-scale easing policies. At that time, Haruhiko Kuroda said he would try anything—buying bonds, ETFs, even injecting the equivalent of $1.4 trillion in two years. As a result, the stock market rebounded, but the yen depreciated nearly 30% within two years. This marked the true acceleration of the yen's decline.

In 2016, there was an interesting reversal. The Bank of Japan announced negative interest rates, and the global economy was sluggish. The Brexit referendum further sparked panic, and everyone flocked to the yen as a traditional safe-haven currency. During that period, the yen even broke 100 yen per dollar, marking one of its strongest moments in recent years. But that was just a fleeting moment.

The real turning point came in 2021. The Federal Reserve announced it would start tightening monetary policy, while Japan remained stuck in low interest rates. This created a huge interest rate differential, attracting investors to borrow low-interest yen to buy high-yield dollar assets. The pressure on the yen to depreciate became unstoppable. 2024 was even a record year, with the yen falling to the 161-162 range, hitting a 32-year low.

Why is it so disastrous? Mainly because the policies of the US and Japan are completely opposite. The Federal Reserve began aggressive rate hikes in 2022, pushing rates above 5% to combat inflation. Meanwhile, the Bank of Japan continued its ultra-loose policy to stimulate the economy, keeping rates near zero. Under such extreme interest rate differentials, yen depreciation seemed inevitable. Coupled with the surge in energy prices caused by the Russia-Ukraine war—since Japan is a major resource importer and its trade deficit kept widening—this further intensified the downward pressure on the yen.

By 2025, the situation became even more complicated. Early in the year, the Bank of Japan finally raised rates to 0.5%, the highest in 17 years, prompting market expectations that Japan would continue to hike. At the same time, the Fed began cutting rates, narrowing the US-Japan interest rate gap. The yen even rebounded from 158 to around 140. It looked like the yen might turn around.

But the good times didn't last. In the second half of the year, the situation reversed again. Although nominal US-Japan interest rate differentials shrank, the real interest differential still favored the US. Japan remained in negative interest territory, and investors still preferred borrowing yen to buy dollar assets. After Prime Minister Sanae Takaichi took office, she continued her expansive fiscal policies, raising concerns about Japan’s fiscal health. Even when the central bank raised rates to 0.75% in December—its highest since 1995—it was seen as a case of pressing both the accelerator and the brake simultaneously. Trump’s tariffs and tax cuts were interpreted as "Trump’s inflation," further supporting the dollar. Ultimately, the yen fell back to the 155-158 range, even hitting a ten-year low.

Ultimately, the yen’s depreciation reflects deeper structural issues in Japan. High debt levels, low growth, an aging population, heavy reliance on energy imports, and inconsistent central bank policies have led the market to remain bearish on the yen long-term. Currently, the yen is at a historic low, presenting trading opportunities, but the underlying logic is quite pessimistic. The future trend of the yen will largely depend on how the US and Japanese central banks adjust their policies. If the US continues to maintain high interest rates and Japan’s economy doesn’t fundamentally improve, the yen’s depreciation could persist. For traders, this presents both opportunities and challenges.