This article organizes the factors behind the yen's depreciation, developments to date, and the key issues ahead. It summarizes the main points, including the widening Japan-US interest-rate gap since 2022, developments in Japan's monetary and fiscal policies, and the effects of coordinated intervention and the market's response.
The widening Japan-US interest-rate gap after the COVID-19 pandemic left Japan maintaining negative interest rates and YCC for an extended period, causing the yen to lose substantial value against the dollar. The yen temporarily weakened in October 2022, and while US rate hikes continued from 2023 onward, Japanese interest rates remained low, allowing the yen's depreciation trend to become entrenched again. From 2024 onward, some viewed the yen as having settled at around ¥150 to the dollar.
The Bank of Japan took a step toward normalizing monetary policy in March 2024, but the size and pace of rate hikes remained gradual. Rates were expected to rise in stages to 0.75% by the end of 2025 and 1.0% by mid-2026. Meanwhile, the US maintained the federal funds rate at a high level, and the policy-rate gap between Japan and the US continued to weigh on the yen.
From July 2026 onward, Japan's Ministry of Finance carried out large-scale dollar-selling and yen-buying intervention, at times curbing the yen's depreciation. From the following day onward, coordinated intervention by the US and Europe also took place, and there were periods when the yen temporarily recovered some ground. However, the intervention's effects did not lead to a long-term shift.
There are 3 key issues ahead: trends in resource and energy prices, the pace of the Bank of Japan's rate hikes and the direction of monetary policy, and a shift in domestic policy regarding fiscal discipline. Externally, trends in crude oil and resource prices are expected to matter, while domestically, the yen exchange rate is expected to be affected by the stance on fiscal management and the combination of that stance with tax cuts.
As the effects of coordinated Japan-US intervention and the market's response are assessed, trends in crude oil, US monetary policy, and the Takaichi administration's fiscal policy are expected to determine the future direction of the yen's depreciation or appreciation.