Lately, watching the yen's trend chart has been a bit headache-inducing. The USD/JPY is oscillating back and forth between 152 and 160, and it's about to hit the 160 mark. Honestly, the yen has depreciated for nearly two years now, with the effective exchange rate hitting a nearly 53-year low, which is quite extraordinary.

Why is this happening? There are just a few core reasons. The US-Japan interest rate differential is still there. The Bank of Japan is slow to raise interest rates, while the U.S. economy remains relatively solid. This has led everyone to engage in arbitrage trading—borrowing cheap yen to invest in high-yield dollar assets, resulting in continuous selling of the yen. Plus, Japan's new government is implementing large-scale fiscal stimulus, which has raised concerns about debt risks, further suppressing the yen's movement.

Adding to that, the Middle East situation remains unstable. Japan heavily relies on Middle Eastern oil imports, which also poses a hidden risk for the yen. Bank of Japan Governor Ueda Kazuo recently stated at the G20 that geopolitical risks are indeed affecting policy pace. The market initially expected a rate hike in April, but due to the Middle East tensions, it was postponed. Now, all eyes are on June, with the market pricing in a 76% chance of a rate hike then.

From an economic fundamentals perspective, domestic consumption in Japan remains somewhat weak, with GDP occasionally contracting, and import-driven inflation pushing up prices. Although wages are growing, real purchasing power is still under pressure. This is also why the Bank of Japan is so cautious about raising interest rates—fearing that too rapid a hike could harm economic recovery.

What do institutions think? JPMorgan’s head of FX strategy in Japan predicts the yen could fall to 164 by year-end. Meanwhile, analysts at BNP Paribas forecast it could drop to 160. They believe that as long as global risk sentiment remains, arbitrage trading will continue, and the yen will face selling pressure in the short term.

However, in the long run, the yen’s trajectory ultimately depends on internal reforms in Japan. For real economic growth momentum, wages and prices need to enter a healthy cycle, establishing a solid foundation for a stronger yen. In the short term, focus should be on the June BOJ meeting, whether the US-Japan interest rate differential can narrow, and changes in global risk sentiment. If you’re planning to travel to Japan, consider buying in installments; if you want to profit from forex trading, it’s best to judge based on your risk tolerance, and consult professionals if necessary.