I have been watching the yen exchange rate recently and realized how sharply the yen has depreciated over the past few years. From 80 yen per US dollar in 2012 to over 160 at one point last year, hitting a 32-year low. Wanting to understand the reasons behind this historical low, I realized that the factors involved are far more complex than I initially thought.

Speaking of which, the turning point from the yen being an appreciating currency to a depreciating one was in 2012. At that time, Shinzo Abe came to power and proposed "Abenomics," and the following year, the Bank of Japan announced an unprecedented large-scale easing policy. The new governor, Haruhiko Kuroda, promised to stimulate the economy through various measures, including purchasing bonds and ETFs, injecting the equivalent of $1.4 trillion in two years. On the surface, the stock market responded positively, but the yen depreciated nearly 30% within just two years. This actually laid the groundwork for the yen’s long-term depreciation.

In 2016, there was an interesting reversal. That year, the Bank of Japan announced negative interest rates, and combined with Brexit triggering global risk aversion, the yen temporarily broke the 100-yen mark, becoming the strongest currency of the year. But this was only a fleeting phenomenon. The real turning point came with the change in the Federal Reserve’s stance. Starting in 2021, the Fed began tightening monetary policy, raising interest rates to over 5%, while the Bank of Japan continued its ultra-loose policies. This widening interest rate differential led to arbitrage trading, with many investors borrowing low-interest yen to buy high-yield dollar assets, pushing the yen down sharply.

Last year’s first half was the worst period for the yen. The US-Japan interest rate gap reached a historic level, and the yen/USD exchange rate briefly broke through 161. Besides monetary policy divergence, energy issues also played a role. Japan is a major resource importer, and the Russia-Ukraine war caused energy prices to soar, expanding the trade deficit and further pressuring the yen to depreciate. Therefore, the reasons behind the yen’s record lows are not just a single factor but a combination of policy, economic structure, and external shocks.

By the second half of last year, the situation started to reverse. In January, the Bank of Japan raised interest rates to 0.5%, the highest in 17 years, and markets began to expect further rate hikes. Meanwhile, the Fed also started cutting rates, narrowing the US-Japan interest rate differential. The yen temporarily rebounded strongly, falling from around 158 at the start of the year to about 140 in April. But this appreciation was mainly a technical rebound driven by policy normalization and narrowing interest rate spreads, not a sign of improved economic fundamentals in Japan.

Later, the trend reversed again. The new prime minister continued expansive fiscal policies, raising concerns about Japan’s fiscal health. Coupled with rising expectations of Trump’s policies, the "Trump inflation" concept supported the dollar index, and the yen depreciated once more. By the end of the year, the Bank of Japan raised rates to 0.75%, the highest since 1995, but the market reacted tepidly, viewing it as a contradictory policy of stepping on the gas and brake at the same time.

In essence, the reasons behind the yen’s record lows are rooted in Japan’s deeper structural issues: high debt levels, low growth, an aging population, and heavy reliance on energy imports. Additionally, the inconsistency between the central bank and government policies has led the market to remain bearish on the yen long-term. The divergence in monetary policy between the BOJ and the Fed still exists, which will determine the future trend of the yen. Currently, the yen is at a historic low, and from a trading perspective, there may be opportunities, but any forex trading requires cautious risk management.