Recently, there has been increasing discussion about the yen exchange rate, which is indeed worth paying attention to. The USD/JPY is still fluctuating in a high range, and in the short term, the yen remains weak.

Several structural factors behind this yen depreciation have been fermenting. First is the issue of the US-Japan interest rate differential. U.S. interest rates remain high, while the Bank of Japan is gradually raising rates but at a noticeably slower pace. This creates ongoing pressure from arbitrage trading—investors borrow low-interest yen to invest in higher-yielding dollar assets, leading to continuous yen selling.

Second is Japan’s domestic fiscal expansion. The new government has introduced large-scale stimulus policies aimed at boosting the economy, but increased government debt issuance and rising deficit concerns have heightened market fears about Japan’s fiscal risks, which also suppresses the yen. Plus, Japan’s economic fundamentals are relatively weak—consumption is sluggish, and the central bank must be cautious with rate hikes.

There’s also the Middle East situation. Japan relies heavily on Middle Eastern oil imports, so if oil prices stay high, import costs will rise, trade deficits will widen, and this is negative for the yen’s outlook.

Regarding the Bank of Japan’s policy, this is key to understanding the yen’s trend. Starting from ending negative interest rates in March 2024, the BOJ has been raising rates to 0.75% by December 2025, the highest in nearly 30 years. However, the pace and magnitude of rate hikes have been viewed as cautious by the market. Initially, there was an expectation of a new rate hike in April, but due to escalating Middle East tensions, the BOJ chose to pause. Still, signals from the quarterly outlook report suggest a 76% chance of a rate hike in June.

If the BOJ actually raises rates to 1.0% in June, the US-Japan interest rate differential will narrow further, which could be a turning point for the yen. Some arbitrage funds might start flowing back, potentially supporting the yen.

What do institutions think? JPMorgan’s forecast is relatively pessimistic, expecting the yen to fall to 164 by the end of 2026. Societe Generale’s forecast is slightly more optimistic, expecting around 160. Their logic is similar—global risk sentiment remains relatively favorable, which continues to support arbitrage trades, and the Federal Reserve might be more hawkish than expected, so USD/JPY could stay in a high range in the short term.

However, for the yen to truly reverse its long-term decline, internal reforms in Japan need to show results. Economic growth momentum must significantly improve, and wages and prices need to enter a healthy cycle to establish a strong foundation for the yen. In the short term, the yen might test between 152 and 160, but the long-term logic suggests the yen will eventually return to its appropriate level.

For those interested in forex trading, these macro factors are worth monitoring—pay attention to the BOJ’s policy signals, changes in the US-Japan interest rate differential, and global risk sentiment fluctuations, as these will directly influence the yen’s direction. Of course, before making any trading decisions, it’s essential to assess your risk tolerance and implement proper risk management.