Recently, I’ve been looking at the Japanese yen exchange rate data and found that this bout of weakness in the yen is really quite serious. The USD/JPY has been repeatedly fluctuating between 152 and 160, and it’s already weakened quite a bit compared with around 158 at the start of the year. What’s even more striking is that the yen’s real effective exchange rate has hit a new low in nearly 53 years, which shows that it’s not only weakening against the US dollar, but also depreciating against other currencies.

The reasons behind it are actually quite clear. First, the US–Japan interest rate differential has been widening continuously, and the Bank of Japan has been moving too slowly on rate hikes. Although it rose to 0.75% at the end of last year, US interest rates are still far higher than that, so carry trades have been continuously selling the yen. Second, Japan’s government is under substantial fiscal pressure. The new government has rolled out large-scale fiscal stimulus, which has made the market worry about debt risk. On top of that, instability in the Middle East has increased the cost of imported crude oil for Japan, the trade deficit has widened, and all of these factors are weighing on the yen.

As for predictions on the yen’s outlook, market institutions aren’t very optimistic. JPMorgan expects that by the end of the year the yen could fall to 164, and BNP Paribas also believes it could drop to around 160. The key point is still when the Bank of Japan will truly start raising interest rates. Previously, people expected a rate hike in April, but it was postponed due to the Middle East conflict. Now June has become the next focus, and the market’s expectation for the probability of a rate hike has risen to 76%.

However, from a long-term perspective on the yen’s trajectory, the yen ultimately still needs to rely on internal economic reforms in Japan. To truly reverse the downturn, you need to see whether economic growth can pick up speed and whether wages and prices can form a positive feedback loop. In the short term, the yen may continue to fluctuate within the 152 to 160 range, but in the long run, it should return to its proper level. If you have plans to travel to Japan, you can consider buying in batches; if you want to do FX trading, it’s still recommended to do a good job of risk management, because volatility in this market is indeed quite significant.