Recently, people have been asking me whether the Japanese yen will continue to fall. To be honest, watching the USD/JPY fluctuate between 152 and 160 has been a bit frustrating. I recently analyzed the logic behind the yen's movement and found that the recent depreciation actually has deep structural reasons.

Let's start with the most straightforward data. Since entering 2026, the yen has not stopped its downward trend; the real effective exchange rate has even hit a 53-year low. This is not just a technical issue but reflects Japan's deep economic difficulties. The interest rate differential between the US and Japan has been widening, which is the main driver of the continued flow of arbitrage trading into the dollar. Investors keep borrowing low-interest yen to invest in high-yield dollar assets, naturally increasing the selling pressure on the yen.

The Bank of Japan's policy shift is also quite interesting. From breaking negative interest rates in 2024 to now, they have been gradually raising interest rates, reaching 0.75% in December last year, a thirty-year high. But this pace is still not fast enough. The market initially expected a hike to 1.0% in April, but when Middle Eastern tensions flared up, and Kuroda Kazuo came out saying they would maintain a wait-and-see stance, the rate hike pace was disrupted. Currently, the market is eyeing June, with the probability of the central bank raising rates then rising to 76%.

Another easily overlooked point is Japan's fiscal issues. Since Sanae Takaichi took office, the large-scale fiscal stimulus policies have short-term economic benefits but long-term debt burdens. The market is quite worried about this, which indirectly reduces the yen's attractiveness. Plus, Japan's economic fundamentals are relatively weak—consumption remains tepid, and import inflation is pushing up prices. In such an environment, the central bank would naturally be cautious about raising interest rates.

Regarding the Middle East situation, its impact on the yen's movement is also significant. Japan relies heavily on Middle Eastern oil imports, and if the Strait of Hormuz is blocked, it directly threatens energy security. Although Japan has strategic reserves and diversified LNG import sources, high oil prices will still widen the trade deficit, further weakening the yen.

Currently, market forecasts for the yen are mainly divided into two camps. JPMorgan's FX strategist Junya Tanase is quite pessimistic, believing the yen could fall to 164 by year-end. Analysts at BNP Paribas predict around 160. Both point out that the global macro environment remains relatively favorable for risk sentiment, which will continue to support arbitrage trading. Meanwhile, the Bank of Japan's cautious stance and the Fed possibly being more hawkish than expected all contribute to the short-term strength of USD/JPY at high levels.

But I personally think we shouldn't be too pessimistic. The key depends on the Bank of Japan's subsequent rate hike pace and whether the US-Japan interest rate differential can truly narrow. If the BOJ raises rates as scheduled in June, the differential will start to shrink, providing real support for the yen. In the long run, the yen's strength ultimately depends on internal structural reforms in Japan—only with a significant boost in economic growth momentum, wages, and prices forming a virtuous cycle can the yen's strength be truly established.

For friends interested in participating in yen trading, my advice is to closely monitor the BOJ's moves, especially the June meeting. Also, keep an eye on US economic data and Federal Reserve policy signals. If you're exchanging yen for travel or consumption needs, consider buying in installments on dips. If you aim to profit from the forex market, be sure to develop strategies based on your risk tolerance, and it's best to consult professional advice and implement good risk management.