Lately, I've been watching the trend of the USD/JPY exchange rate. To be honest, this wave of yen depreciation has been quite fierce. As of the end of May, the USD/JPY was fluctuating between 152 and 160, and the effective exchange rate even hit a nearly 53-year low, which is really extraordinary.

A careful analysis of why this is happening shows that it’s actually a combination of several structural factors. First, the US-Japan interest rate differential has been widening. Although the Bank of Japan raised rates to 0.75% last December, the Federal Reserve's rates are still higher, leading to frequent arbitrage trading—everyone is borrowing yen to invest in dollar assets, causing the yen to be sold off aggressively. Additionally, Japan’s new government has launched large-scale fiscal stimulus, increasing government debt issuance, which raises concerns about fiscal risks and further weakens the yen.

The Middle East situation is also a problem. Japan heavily relies on Middle Eastern oil imports, and the risks in the Strait of Hormuz directly impact Japan’s energy costs. The trade deficit widens, and the yen’s trend naturally becomes weaker. Moreover, Japan’s economic fundamentals are not very optimistic—weak consumer spending and imported inflation pushing up prices—all of which make the Bank of Japan cautious about raising interest rates.

Looking ahead, June has become a critical point. The market now expects the Bank of Japan to raise rates to 1.0% with a probability of 76%. If the rate hike is successful, the US-Japan interest differential will narrow, potentially attracting arbitrage capital back, which could help the yen. JPMorgan is more pessimistic, predicting the yen could fall to 164 by the end of the year; France’s BNP Paribas forecasts it could drop to 160.

But honestly, for the yen to truly reverse its long-term downward trend, it still depends on Japan’s internal performance. The economy needs to see a significant boost in growth momentum, and wages and prices must establish a healthy cycle. Only then can the yen’s trend fundamentally change. In the short term, it may still oscillate within a high range, and we’ll have to wait and see for a clear reversal.