Recently, with the strong performance of US economic data, especially the core Consumer Price Index (CPI), market expectations for continued interest rate hikes by the Federal Reserve (Fed) have intensified, keeping the US dollar strong relative to other currencies. In contrast, the Japanese yen has faced depreciation pressure under the Bank of Japan’s continued implementation of an accommodative monetary policy. As of February 13, the USD/JPY exchange rate fell from 151.22 at the beginning of the year to 154.78, with a cumulative fluctuation of 4%. Against this backdrop of economic and monetary policy divergence, the trend of USD/JPY remains highly uncertain, with market sentiment and shifts in national policies being key factors for future movement.
Although the Federal Reserve ended its rate hike cycle in December 2024, market expectations for the timing of rate cuts have been repeatedly revised. In January 2025, the US core CPI still recorded a year-on-year increase of 3.1%, exceeding the 2% target range, leading federal funds rate futures to shift expectations for the first rate cut from March to June. This policy uncertainty has caused the US Dollar Index to fluctuate within the 103-105 range, exerting temporary pressure on the yen exchange rate.
As of February 14, the 10-year US Treasury yield remained at 4.18%, with the yield spread over Japanese government bonds narrowing to 359 basis points (Japanese 10-year government bond yield at 0.59%). The narrowing spread reduces the attractiveness of the yen as a funding currency, prompting some arbitrage funds to return to Japan, becoming an important factor driving yen appreciation.
Japan’s nominal wages grew by 4.8% year-on-year in December 2024, the highest increase since 1997, and real wage growth also rebounded to 2022 levels. This change aligns with the framework proposed by Bank of Japan Governor Kazuo Ueda of “3% wage growth supporting 2% inflation”, laying the foundation for monetary policy normalization. On January 24, 2025, the Bank of Japan raised its policy rate from 0.25% to 0.5%, marking the end of the ultra-loose era.
Although the Japanese Ministry of Finance has not directly intervened in the market, the central bank holds foreign exchange reserves totaling 1.3 trillion US dollars, forming an implicit deterrent. The market widely believes that if the USD/JPY breaks through the 155 level, authorities may take actions such as selling US Treasuries to stabilize the exchange rate, which limits the short-term depreciation space of the yen.
According to data from the Bank for International Settlements (BIS), yen arbitrage trading volume in 2024 was approximately 2.8 trillion US dollars, mainly flowing into US tech stocks and emerging market bonds. With the rise in Japan’s risk-free interest rate, overseas investors’ net sales of Japanese bonds reached 4.2 trillion yen in January 2025, a new high since 2020, indicating an accelerating trend of capital repatriation.
Yen appreciation affects Asian economies through two channels:
(1) Export competition: currencies such as the Korean won and Taiwan dollar are under passive pressure, with the Korean won depreciating 1.2% against the US dollar in February;
(2) Capital flows: Japanese investors reduced holdings of Thai and Indonesian bonds by 1.2 billion and 800 million US dollars respectively, exacerbating volatility in Southeast Asian markets.
Spring Labor Negotiations: The 2025 Japanese spring labor negotiations (collective wage bargaining) are expected to result in wage increases of over 5%, reinforcing inflation persistence;
US-Japan Trade Rebalancing: Japan’s trade surplus with the US reached 68.3 billion US dollars, and yen appreciation helps alleviate US tariff pressures.
Federal Reserve Policy Uncertainty: If US inflation rebounds and delays rate cuts, the US dollar may regain upward momentum;
Geopolitical Shocks: Escalation of Middle East tensions could boost the safe-haven US dollar and suppress yen performance.
The current yen exchange rate is in a window of contest between “fundamental improvement” and “external constraints”. In the short term, expectations of Bank of Japan rate hikes and unwinding of arbitrage trades may support yen fluctuations within the 150–155 range; in the medium to long term, attention should be paid to the Federal Reserve’s policy trajectory and whether Japanese small and medium enterprises can adapt to a strong yen environment. For Asian investors, it is important to be aware of the repricing risks of exchange rate volatility on cross-border investment portfolios and to watch for arbitrage opportunities arising from adjustments to Japan’s yield curve control (YCC) policy.
*The content of this article is for sharing and reference purposes only and does not constitute professional investment advice. Due to differences in individual circumstances and needs, you may contact the Cashback Island team or consult your financial planner for professional advice.
A higher Japanese Yen to US Dollar exchange rate does not necessarily mean it is “better”; it depends on the perspective. First, clarify what “a higher Japanese Yen to US Dollar exchange rate” means:
Assuming the current rate is 1 USD = 150 JPY. If the rate changes to 1 USD = 160 JPY, the exchange rate number becomes “higher”, which means the yen is depreciating. If it changes to 1 USD = 130 JPY, the exchange rate number becomes “lower”, meaning the yen is appreciating. Therefore, “higher exchange rate” = yen depreciation, “lower exchange rate” = yen appreciation.
Who benefits or loses from yen depreciation (higher exchange rate) / appreciation (lower exchange rate)?
| Position | Higher Exchange Rate (Depreciation)） | Lower Exchange Rate (Appreciation) |
| Exporters | Beneficial: Goods become cheaper, stronger competitiveness | Detrimental: Goods become more expensive, orders may decrease |
| Importers | Detrimental: Import costs increase | Beneficial: Import costs decrease |
| Overseas Travelers | Detrimental: Traveling abroad becomes more expensive | Beneficial: Traveling abroad becomes cheaper |
| Domestic Prices | Detrimental: Imported goods become more expensive, increasing inflation pressure | Beneficial: Less price pressure |
| Investing in Overseas Assets | Detrimental: Foreign exchange losses | Beneficial: Foreign exchange gains |
| Overseas Investors | Beneficial: Investing in Japanese stocks and assets becomes cheaper | Detrimental: Assets become more expensive, possibly reducing investment |
You can view real-time exchange rates on Google Finance pages, as well as refer to real-time rate summaries on other trading tools/platforms.
