I’ve been watching the yen’s movement for a while and found that this wave of yen depreciation is really quite fierce. The USD/JPY exchange rate has gone from around 158 at the start of the year to hovering near 159 now; it even briefly nearly touched 160. The real effective exchange rate has also hit a new nearly 53-year low. To be honest, the reasons behind this are far more complicated than they look on the surface.

Let’s start with the most direct one— the interest rate differential between the U.S. and Japan. U.S. interest rates are high, while Japan’s are low, which leads everyone to borrow yen to invest in U.S. dollar–denominated assets. Arbitrage trading is frequent, and downward pressure on the yen has been persistent. Although the Bank of Japan has been raising interest rates, the pace simply can’t keep up with the U.S. On top of that, the new Japanese government has rolled out large-scale fiscal stimulus, increasing bond issuance. The market is worried about fiscal risk, which further weighs on the yen.

There’s also a factor you can’t ignore—the situation in the Middle East. Japan is highly dependent on Middle Eastern oil imports. If the Strait of Hormuz is blocked, it directly threatens energy security. Oil prices staying high pushes up import costs and widens the trade deficit. This also makes the Bank of Japan more cautious about raising rates, for fear of hurting the economic recovery.

When it comes to central bank policy, this really is the core that determines the yen’s trend. Since the Bank of Japan raised rates from last January to 0.5%, it stayed put for more than half a year, only raising again to 0.75% in December—its highest level in 30 years. The market originally expected a rate hike to 1.0% in April, but fighting in the Middle East disrupted the plan. However, according to the latest expectations, June has become the next key window for a rate hike, and the market’s probability for a June hike has already risen to 76%.

Let’s see what institutions are saying. JPMorgan is the most pessimistic, saying the yen could fall to 164 by the end of the year. Société Générale also expects it to move down to 160 by year-end. Their logic is largely the same—global macro conditions still support risk sentiment, arbitrage trading is likely to continue, and the Bank of Japan’s actions remain cautious, while the Federal Reserve could turn out to be more hawkish than expected.

In the short term, USD/JPY should still move in a range of 152 to 158. If it really keeps sliding all the way to 160, Japanese authorities might step in to intervene. But these measures usually only buy time and are difficult to fundamentally reverse the trend.

If you want the yen to truly stop its downtrend, you still need to see whether Japan can deliver results internally. Economic growth momentum needs to clearly improve, and the positive feedback loop between wages and prices needs to take hold—only then can confidence in a stronger yen be truly established. Right now, the situation is that these three factors—interest rate differentials, policy, and global sentiment—are still not very friendly to the yen. If you have needs for traveling in Japan or consumption there, you may consider buying on rallies in batches. If you want to profit from exchange-rate fluctuations, you should also take a close look at how these factors are changing and do a good job with risk control.