Japanese Yen Investment Beginner's Guide: Master the Core Logic and Profit Strategies of JPY Trading

Why Are Global Investors Focusing on the Japanese Yen?

The Japanese Yen (JPY) is the third most traded currency worldwide, with market liquidity second only to the US dollar and euro. As Japan’s national currency, it holds a significant position in the international foreign exchange market—not only as a major foreign exchange reserve for many central banks but also as the preferred safe-haven asset for global institutional investors.

In the ranking of foreign exchange trading volume, the USD/JPY pair consistently ranks second. The reason for this currency pair’s prominence mainly stems from Japan’s unique economic background. As the world’s second-largest economy, Japan has a stable political environment, transparent policies, and economic data that are relatively easy to forecast. This makes the Yen not only highly liquid but also capable of providing a relatively stable trading environment.

Unique Investment Characteristics of the Yen

Low Interest Rate Environment Creates Arbitrage Opportunities

Since the 1990s, Japan has implemented a low-interest-rate policy, making the Yen the currency with the lowest global financing costs. This environment has led to a widely adopted strategy among international investors—carry trading.

Simply put, carry trading involves borrowing Yen at low interest rates, investing the funds in high-yield assets (such as other high-interest-rate currencies or stocks), and earning the interest rate differential. This operation is especially attractive to experienced forex traders, who often use margin trading to enhance efficiency.

Linkage Effect of Asian Currencies

Historically, the Yen’s movements have shown a clear transmission relationship with other Asian currencies. When the Yen depreciates, Japanese goods become cheaper on the international market, creating competitive pressure for other Asian export countries, which may also see their currencies depreciate to maintain competitiveness.

The underlying logic behind this phenomenon is that many Asian economies are export-oriented, with similar industrial structures and intense trade competition. Therefore, monitoring Yen trends can help traders identify trading opportunities in other Asian currencies.

Fundamental Reasons for the Yen’s Significant Fluctuations

In recent years, the Yen has shown a clear depreciation trend, which is not accidental but a result of changes in the global economic landscape.

Impact of the Global QE Wave

After the COVID-19 pandemic outbreak in 2020, central banks around the world launched quantitative easing (QE) policies. The Federal Reserve’s actions were the most aggressive, doubling the US dollar circulation in a short period. In this “rising tide” environment, the Yen’s exchange rate against the dollar began to depreciate steadily.

Although the Fed later hinted at rate cuts, the Yen’s depreciation momentum temporarily slowed. However, the Bank of Japan did not follow suit; instead, it increased QE measures further, pushing the Yen’s exchange rate even lower.

Shift in Japan’s Policy Intentions

Over the past 30 years, Japan has mostly maintained monetary stability, with exchange rate fluctuations driven by changes in other countries. But now, the situation has changed—Japan has begun actively adjusting its monetary policy to stimulate exports.

A weaker Yen directly benefits Japanese companies’ overseas sales, boosting export growth. This explains why the Japanese government tends to maintain an accommodative policy: a depreciated Yen is more conducive to the country’s economic development.

Decisive Role of US-Japan Interest Rate Differential

Even if Japan begins to raise interest rates, the magnitude will be much smaller than that of the US. Whether the US raises or cuts rates, the extent is relatively large, so the US interest rate policy mainly determines the US-Japan interest rate differential. When the differential widens, the Yen tends to weaken; when it narrows, the Yen tends to strengthen. In early 2024, the Yen hit a 38-year low (1 USD = 160 JPY), primarily due to the US delaying rate cuts, which continued to expand the interest rate differential.

Analysis of USD/JPY Exchange Rate Trends

Two Distinct Periods

2015–2020

Japan’s QE pace was comparable to the US, and the US interest rates gradually declined. Relative to this, the USD/JPY value gradually decreased. During this period, USDJPY maintained relatively stable fluctuations within a certain range.

2021–2024

Japan significantly increased QE to stimulate export growth. The Yen entered an accelerated depreciation phase, reaching a low of 1 USD = 160 JPY in early 2024. This caused substantial pressure on the Japanese economy, prompting the Bank of Japan to implement rate hikes in July. However, after Donald Trump was elected US President, policy uncertainties again boosted US dollar demand, and the Yen faced renewed depreciation pressure.

Outlook for 2025 and Beyond

The future trend of the Yen will be influenced by multiple factors:

Factors Supporting Depreciation

• Uncertainty from Trump’s policies increasing global risk aversion, supporting the US dollar
• The potential further widening of the US-Japan interest rate differential, exerting downward pressure on the Yen
• Japan’s slow economic recovery, with limited room for rate hikes

Factors Supporting Appreciation

• Development of emerging Japanese industries could boost international capital confidence in Japan
• If the Bank of Japan continues rate hikes in 2025, the interest rate differential may narrow
• New opportunities arising from global economic restructuring

Overall Assessment

Given Japan’s export-driven nature, the government generally prefers to maintain an accommodative policy to keep the exchange rate advantageous. Unless the US intervenes forcefully, the Yen’s appreciation potential is limited, while depreciation space remains relatively ample. Market consensus generally expects the Yen to continue facing downward pressure in 2025.

Differences among major financial institutions’ forecasts reflect varying outlooks—ranging from a forecast of 160.8 by trading economics, 160 by TD Securities, to a relatively optimistic 140 by Morgan Stanley—indicating that Yen’s future movement still contains significant uncertainties.

Three Main Ways to Invest in the Yen Compared

1. Bank Currency Exchange

This is the most traditional method. Japan is a popular travel destination, and Taiwanese tourists have strong demand for Yen. Banks usually have ample Yen cash supplies.

Advantages: Simple and straightforward, suitable for those with travel or business needs

Disadvantages:

• Large bid-ask spreads, high transaction costs
• Low returns, requiring substantial principal to earn significant profits
• Not suitable for professional investors

2. Investing in Yen-denominated Financial Products

This includes Japanese stock ETFs, Japanese stocks, Japanese bonds, and other assets. Recently, Japanese stocks have performed strongly, with corporate profits reaching new highs, attracting many international investors.

Advantages: Participate in Japan’s economic growth, with potentially higher returns

Disadvantages:

• Need to consider both exchange rate fluctuations and asset price changes
• More complex risks, requiring investment experience
• Suitable for investors with certain financial knowledge

3. Forex Margin Trading in Yen

This is the most efficient way to invest in Yen. Traders do not need to physically buy Yen but profit from the exchange rate movements of currency pairs like USDJPY.

Core Features:

• Both long and short positions available, can profit from rising or falling prices
• Leverage can be used, requiring only a margin deposit to participate
• Low costs, high liquidity, and convenient trading

Suitable for: Investors with certain risk tolerance and financial knowledge. Due to leverage amplifying both gains and losses, strict risk management is essential.

Five Key Factors Affecting Yen Trends

Investing in Yen requires close monitoring of the following indicators:

US Treasury Yields

US Treasury bonds and Yen are both safe-haven assets, competing for capital flows. When yields rise, Yen attractiveness diminishes; when yields fall, Yen demand increases.

Federal Reserve Policy Direction

US rate hikes will widen the US-Japan interest rate differential, negatively impacting the Yen; rate cuts will narrow the differential, benefiting the Yen. Since Japan’s rate hikes are usually much smaller than the US, the exchange rate trend is mainly determined by the Fed.

Trade Balance

Currencies are essentially commodities. If global demand for Japanese goods increases, the Yen will be in short supply and appreciate; conversely, if Japan’s imports increase, excess Yen supply will lead to depreciation.

Japan’s Domestic Economic Conditions

Japan has maintained low interest rates for a long time due to economic weakness. However, recent record-high stock prices and increased corporate exports could trigger domestic inflation. If inflation accelerates, Japan might speed up rate hikes or halt QE, pushing the Yen higher. But this scenario is less likely—Japan has waited 30 years for inflation and is more likely to welcome rather than suppress inflation.

Bank of Japan Policy Trends

The BOJ’s main policy over the past 30 years has been QE. The market has clear expectations; any deviation (such as stopping QE) could cause short-term large fluctuations in the exchange rate. Investors interested in short-term Yen trading should closely follow BOJ policy developments.