How to View the Yen Exchange Rate: A Comprehensive Analysis from QE Policies to Investment Opportunities

As the world’s second-largest economy, Japan’s currency, the yen (JPY), is not only the most important liquid asset in Asia but also the preferred safe haven for international investors. However, in recent years, the yen has shown a continuous depreciation trend. What economic logic is hidden behind this? For those interested in participating in yen investments, how can they seize the opportunities?

The Unique Identity and Market Position of the Yen

The yen ranks third in the global foreign exchange market, only behind the US dollar and euro. The USDJPY (US dollar to yen currency pair) is the second most traded currency pair worldwide, with high liquidity, meaning narrower bid-ask spreads.

Japan’s stable economic structure and high policy transparency make the yen the first choice for global investors seeking safety during market turbulence. When international situations become uncertain, funds flow into the yen to hedge risks, pushing the yen higher; conversely, when the economy warms up, investors convert yen into other high-yield currencies to seek higher returns.

However, Japan’s long-term low-interest-rate environment is key to understanding the current yen trend. Since the burst of the economic bubble in the 1990s, the Bank of Japan has maintained a low-interest policy, making the yen the most popular funding currency in carry trades—investors borrow low-cost yen to invest in high-yield assets, earning the interest rate differential.

Why Is the Yen Depreciating? The Truth About QE Policies

After the COVID-19 pandemic outbreak in 2020, central banks worldwide launched quantitative easing (QE) policies, especially the US. In just a few years, the global US dollar circulation doubled. This aggressive money printing directly led to a significant depreciation of the yen against the dollar.

During this period, the Bank of Japan increased its QE efforts, even surpassing the US, which has been the main driver of the yen’s continued depreciation. In early 2024, the yen briefly fell to 160 yen per US dollar, hitting a 38-year low.

On the surface, yen depreciation benefits Japanese exporters—lower prices for goods, increased competitiveness, and thus, the Japanese stock market hit record highs. But this policy shift reflects a change in Japan’s strategy: no longer passively responding to exchange rate fluctuations but actively using depreciation to stimulate the economy.

Even when the Bank of Japan raised interest rates in July to stabilize the exchange rate, the effect was limited. The situation became more complex after Donald Trump was elected—US protectionist policies and tax cuts are expected to boost inflation, potentially delaying Fed rate cuts, which in turn puts new downward pressure on the yen.

Yen Future Trends and Institutional Perspectives

Regarding the yen’s direction in 2025, market institutions have varied views:

Most are bearish on the yen (expecting USD appreciation):

• Trading Economics forecasts USDJPY at 160.8 by the end of 2024, rising further to 162.3 in Q1 2025
• HSBC UK predicts that by the end of June 2025, 1 USD will exchange for 160 yen
• Barclays expects 158 yen per dollar by the end of March 2025

A minority are optimistic about yen appreciation:

• Morgan Stanley predicts USDJPY at 140, believing the US economy will slow in the first half of 2025, with the Fed cutting rates by 1%, while the Bank of Japan raises rates, narrowing the US-Japan interest rate differential

Longforecast’s neutral outlook suggests USDJPY will fluctuate within the 150-170 range.

It is important to note that these forecasts are based on current market conditions; actual exchange rates will be influenced by many uncontrollable factors.

Five Key Factors Determining Yen Trends

1. US-Japan Interest Rate Differential

This is the most direct factor affecting the yen. US interest rate decisions have a much larger impact than Japan’s, so the differential is mainly determined by the US. When the US raises interest rates, the differential widens, and the yen depreciates; when the US cuts rates, the yen appreciates.

2. US Treasury Yields

US Treasuries and the yen are both safe-haven assets and compete with each other. When treasury yields rise, funds flow into bonds, reducing the attractiveness of the yen; conversely, the yen becomes more attractive.

3. Trade Structure and Export Demand

Currencies are essentially commodities, with prices determined by supply and demand. If global demand for Japanese goods is strong, the yen appreciates; if Japan’s imports increase, the yen depreciates. Currently, Japanese exports are strong but face competition from other Asian currencies.

4. Domestic Inflation and Economic Trends in Japan

The Japanese stock market has hit record highs, and corporate profits are at new peaks, which could trigger domestic inflation. If inflation truly materializes, the Bank of Japan might accelerate rate hikes, significantly supporting the yen. However, given Japan’s subdued economy over the past 30 years, authorities are relatively tolerant of mild inflation.

5. Bank of Japan Policy Expectations

The BOJ’s policy over the past 30 years has been QE. Any unexpected moves (such as stopping QE or accelerating rate hikes) could cause significant short-term volatility. Monitoring central bank actions is crucial for swing traders.

Three Main Ways to Invest in Yen

Bank Currency Exchange

This is the most traditional and straightforward method, suitable for those with travel or trade needs. However, since physical cash transactions are niche, spreads are large, making it inefficient for investment purposes. Usually, large capital is needed to generate substantial profits.

Yen-denominated Financial Products

You can directly buy Japanese stocks or funds. This method requires considering both exchange rate fluctuations and stock price movements, suitable for experienced investors or those choosing managed funds to reduce difficulty.

Forex Margin Trading

This is the most efficient way to participate. Investors do not need to physically buy or sell yen but profit from fluctuations in the currency pair. The advantage of this method is that both long and short positions are possible, and leverage can be used—requiring only a margin deposit to participate. It is especially suitable for speculation or hedging.

Important Tips for Yen Investment

Many beginners are confused about the outlook for the yen. In fact, understanding yen trends requires more than just looking at surface economic data; it’s essential to grasp policy orientation—the Japanese government has shifted from a passive response to exchange rates to actively using monetary policy.

Considering all factors, the probability of significant rate hikes for the yen is low. As long as the US does not intervene forcefully, the yen’s appreciation has a ceiling, but depreciation has no lower limit. Under this expectation, there is limited room for the yen to appreciate substantially.

For investors wanting to participate in yen trading, the key is to establish a systematic analysis framework—pay attention to Fed policies, BOJ movements, global trade patterns, and market sentiment changes. In the short term, the yen’s depreciation trend is likely to continue, but in the medium term, if Japan’s inflation accelerates and the BOJ speeds up rate hikes, the yen could reverse.

Finding opportunities amid volatility, seeking certainty through analysis—that is the core of yen investment.