I’ve been looking at the yen’s price trend lately and noticed an interesting phenomenon—why has the yen kept falling? Behind this, there are actually a number of structural issues.

From the beginning of this year until now, the USD/JPY exchange rate has been fluctuating between 152 and 160. In mid-May, it was still hovering around 159, and the real effective exchange rate has already hit a nearly 53-year low. It looks like the Bank of Japan has raised interest rates, but the yen hasn’t strengthened as expected—instead, it continues to face downward pressure.

The most straightforward reason is the interest rate differential between the US and Japan. US interest rates are still far higher than Japan’s. Even though the Bank of Japan raised its policy rate to 0.75% in December last year (a 30-year high), it is still much lower compared with the US. This keeps carry trades in place—investors borrow low-interest Japanese yen to invest in higher-yielding US dollar assets, and the yen faces continuous selling pressure. Even with rate hikes, the market remains cautious about the pace of further increases.

Another important factor is Japan’s economic fundamentals. Domestic consumption is weak; GDP occasionally turns negative. Import inflation is also pushing up prices. Even though wages are growing, real purchasing power is still being suppressed. This makes the Bank of Japan very conservative in raising rates, fearing that excessive tightening could hurt the recovery. The situation in the Middle East is also not helping—Japan relies heavily on Middle Eastern oil imports. If the Strait of Hormuz is blocked, energy security is directly threatened, and oil prices staying high also increases import costs.

The new government’s fiscal expansion policy is another source of pressure. Sanae Takchi continues the style of “Abenomics,” rolling out large-scale stimulus measures, but this leads to increased government bond issuance and a growing concern over fiscal deficits. The market worries about fiscal risk, further weighing on the yen.

As for future price direction, the key still comes down to when the Bank of Japan will truly accelerate its rate hikes. Previously, the market expected a move to 1.0% in April, but plans were disrupted by the situation in Iran. Now, attention has shifted to the June meeting. According to a Reuters survey, about two-thirds of economists expect the Bank of Japan to raise rates to 1.0% by the end of June. If June does bring a rate hike, the US-Japan interest rate differential could narrow, potentially drawing some arbitrage funds back—only then would the yen have a chance to rebound.

However, institutional forecasts are still relatively bearish. JPMorgan’s head of Japanese foreign exchange strategy believes the yen could fall to 164 by year-end. BNP Paribas expects it could drop to 160. Their logic is that global risk sentiment should still be fairly good this year, which usually supports carry trades continuing. In addition, the Federal Reserve could be more hawkish than expected, keeping the dollar strong.

In the long run, for the yen to truly reverse its slump, it still needs reforms within Japan. Economic growth momentum must improve clearly, and the positive “wage-price” cycle needs to take hold for the yen to build a genuinely strong foundation. In the short term, with the US-Japan interest rate differential continuing to widen and the central bank’s policy shift being slow, it is indeed difficult for the yen to strengthen strongly.

If you have plans to travel to Japan or spend there, you can buy yen in batches to diversify and spread out your costs. For those who want to trade in the foreign exchange market, you can pay more attention to key indicators such as the Bank of Japan’s policy moves, changes in the US-Japan interest rate differential, and global risk sentiment, and make decisions based on your own risk tolerance.