Cover Story: Yen’s Decline Tied to U.S.-Japan Rate Gap Is Seen Stretching to 2025

The article discusses the depreciation of the Japanese yen and its multifaceted impacts on Japan's economy and international travel dynamics, particularly with China.

The article opens with Zhao Nan exchanging currency for a trip to Japan during the May Day Golden Week holiday, noting that 1 yuan could now exchange for nearly 22 yen, marking a more than 10% increase since the beginning of the year [para. 1]. This currency depreciation has led to a surge in Chinese tourism to Japan, making it the top destination for Chinese travelers during the Golden Week holiday [para. 2].

The yen’s depreciation accelerated since April 2023, hitting a record low of 160 yen against the U.S. dollar on April 29, the lowest since 1990 [para. 3]. Despite interventions by the Japanese Ministry of Finance, the yen remained around 157.5 yen per dollar by May 30 [para. 3]. This currency decline has had a mixed impact on Japan's economy—boosting tourism and exports but adversely affecting GDP, which shrank by 0.5% quarter-on-quarter and 2% year-on-year in the first quarter [4, 5].

Due to the weakening yen, Japan's nominal GDP is projected to drop, allowing India to overtake Japan as the world's fourth-largest economy next year [para. 6]. The Nikkei 225 index reached a 34-year high in March 2024 due to strong export earnings but faced volatility later due to the yen’s rapid depreciation [para. 7]. Factors contributing to the yen’s decline include expectations of rate cuts by the Federal Reserve and the Bank of Japan's dovish stance, leading to a considerable interest rate gap between Japan and the U.S. [para. 8].

Opinions are divided over the Bank of Japan's policy. Some experts argue that the finance ministry should handle currency interventions, while the BOJ should focus on gradual rate increases [para. 9]. Most agree that the yen’s future value will depend heavily on U.S. economic policies and potential structural reforms in Japan [10, 11].

The article then highlights factors contributing to the yen's decline, such as the widening interest-rate differentials. The Bank of Japan raised the short-term rate minimally in March, the first increase in 17 years, which failed to curb the depreciation trend [12, 13]. Speculative activities and substantial carry trades have further pressured the yen downwards, with speculative short positions against the yen reaching the highest level since June 2007 [14, 15].

Retail investors, especially influenced by policies like the Nippon Individual Savings Account (NISA), have shifted investments from cash to more lucrative options, including foreign assets, which has further weakened the yen [16, 17, 18].

Despite interventions amounting to 9.79 trillion yen over the past month aimed at slowing the yen’s depreciation, these measures have only managed to delay the decline instead of reversing it. Japan’s foreign exchange reserves stand at about $1.14 trillion, with around 40 trillion yen available for supporting the currency [19, 20, 21]. However, experts believe that without a significant rate hike, shorting the yen will remain attractive [22, 23].

The future of the yen is considered highly dependent on U.S. Federal Reserve policy decisions. A potential Fed rate cut could reduce the appeal of carry trades, thereby possibly boosting the yen [para. 24]. While the Bank of Japan is expected to make some financial moves, the yen's significant appreciation will be limited without a reduction in the interest rate differential [25, 26].

Ultimately, the article underscores the intertwined nature of Japanese and U.S. economic policies on the yen's valuation and anticipates varying outlooks contingent on future central bank actions [27, 28, 29].