Decade-long depreciation mystery: After the US dollar exchange rate hits its lowest point in history, does the Japanese yen still have a chance to rebound?

The decline of the Japanese Yen against the US dollar has hit a 32-year low, driven by a divergence in monetary policies. In November 2023, the Yen briefly fell to 151.94 JPY per USD, compared to 80 JPY a decade ago. What has caused the Yen to fluctuate from appreciation to depreciation? When will this wave of decline come to an end?

The Three Major Drivers Behind a Decade of Decline

The continuous weakening of the Yen is not accidental but the result of multiple factors stacking up.

The significant divergence in monetary policy is the core driver. At the end of 2012, the Abe government launched an extremely loose quantitative and qualitative easing policy, flooding the market with funds through large-scale government bond purchases to weaken the Yen and stimulate exports. Meanwhile, the Federal Reserve began gradually normalizing policy from 2013, and by 2022, it had rapidly raised interest rates, creating a huge interest rate differential between Japan’s negative rates and the US’s high rates. The larger the US-Japan interest rate gap, the more capital tends to flow into the US, putting downward pressure on the Yen.

Trade imbalance has exacerbated the depreciation. Japan’s dependence on energy and food imports is as high as 88% and 63%, respectively. Against the backdrop of soaring global commodity prices, Japan’s trade deficit hit a record high, effectively meaning the market is continuously selling Yen to buy dollars for imports and daily needs.

Structural economic challenges exert long-term pressure. Population decline, aging demographics, labor shortages, and sluggish private consumption—these structural issues limit Japan’s economic growth potential and weaken investor confidence in the Yen.

Historical Trajectory: Three Clear Depreciation Cycles

Looking at the past ten years, the Yen has experienced three distinct depreciation phases:

2013-2015: Abe’s Policy Effect. The Yen depreciated by 18% and 12% in 2013 and 2014 respectively, with the USD/JPY exchange rate rising from 76 to 126. This was driven by large-scale easing policies, and pessimistic market expectations about Japan’s economic outlook further fueled Yen selling.

End of 2016: Fed Rate Hike Impact. The USD/JPY rate rose from 100 to 120 within a few months as overseas capital accelerated inflows into the US. Interestingly, during this period, Yen depreciation benefited Japan’s economy, with exports, industrial output, and consumption showing signs of improvement.

2022: The Peak of Interest Rate Differential. Under the dual effect of aggressive Fed rate hikes and the Bank of Japan’s steadfast easing, the Yen hit a 1990s low of 151.942 in October 2022, depreciating by 31.2% that year.

After the Lowest USD Exchange Rate in 2023

In early 2023, the Yen briefly appreciated to 127.2 JPY per USD amid market expectations of a policy shift by the Bank of Japan. However, the new governor, Ueda Kazuo, ultimately maintained negative interest rates, causing the Yen to weaken again. By November, the Yen hit 15-32 year lows against the USD, EUR, and GBP.

According to the Nikkei Currency Index, the Yen’s performance in 2023 lagged behind the US dollar, euro, and other major currencies for three consecutive years—reflecting the extreme caution of the Bank of Japan’s policies. Throughout 2023, the BOJ emphasized the importance of maintaining easing, fearing that tightening policies could undermine the emerging inflation signs.

In contrast, Japan’s economy itself is showing positive signs. GDP grew by 2.7% in Q1 and 4.8% in Q2, but plummeted to -2.1% in Q3. To address this volatility, the Japanese government launched its largest economic stimulus package since 2014 in November, totaling over 17 trillion yen. International organizations generally believe this will help boost the economy.

Is Depreciation a Curse or a Blessing?

While Yen depreciation seems unfavorable for Japan, it actually produces complex effects. A 40% decline against the dollar means Japan’s land and labor costs are relatively 40% cheaper, which is highly advantageous for attracting foreign investment and boosting exports. Japan’s GDP reached 546 trillion yen in 2022, up about 10% from 495 trillion in 2012, and this long-term growth has been significantly aided by Yen depreciation.

On the other hand, domestic inflation in Japan is also rising. In November, core CPI reached 106.4, up 2.5% year-on-year, marking 27 consecutive months of increase and surpassing the BOJ’s 2% target. However, real wages have decreased for 19 consecutive months, and household consumption is declining—indicating that the purchasing power of ordinary Japanese households is shrinking.

What to Expect in 2024: Variables Ahead?

The future of the Yen depends on the policy choices of the US and Japanese central banks. If the Fed ends its tightening cycle or even begins to cut rates, and the BOJ ends its negative interest rate policy and starts raising rates, the interest rate differential will narrow significantly, and the Yen could regain strength, weakening the dollar.

In December, the Fed held steady and signaled possible rate cuts in the future, providing temporary support for the Yen, which briefly rose to around 140. This indicates market expectations of a policy shift by the Fed are forming.

For forex traders, the Yen at these historic lows is a double-edged sword—offering profit opportunities but also containing volatility risks. Forex trading requires careful strategy and risk management; blindly following trends only increases the likelihood of losses.

The story of the Yen is far from over. The key factors will be the actual policy directions of the US and Japanese central banks over the next year, and whether Japan’s economy can stabilize and meet growth expectations.