Since early 2024, the Bank of Japan has been gradually moving toward monetary policy normalization, and multiple rate hikes have significantly increased market attention on the future trend of the yen. With the yen hovering around the 150 level against the US dollar recently, rate hike developments, Federal Reserve policy direction, and Japan’s economic fundamentals are jointly shaping the outlook for the yen’s exchange rate.
As domestic inflation in Japan remains within the 2% to 3% range and wage growth shows a clear recovery, expectations for further rate hikes by the Bank of Japan are rising. After raising the policy rate to 0.5% in January 2024, the market has widely anticipated that the central bank may initiate additional hikes within the year, with rates possibly exceeding 1% by the end of the year.
Former Bank of Japan Deputy Governor Masazumi Wakatabe recently stated publicly that Japan now has the basis for continued rate hikes, and policy rates would need to exceed 1% to approach the so-called “neutral rate”, which neither overheats the economy nor suppresses growth. Previous research by the Bank of Japan also indicated that the neutral rate is roughly between 1% and 2.5%.
If Japan’s interest rate level moves toward 1% or even higher, it will undoubtedly provide support for the yen’s exchange rate. Particularly against the backdrop of rising expectations for a Federal Reserve rate cut, changes in the interest rate differential between Japan and the US will become a key factor influencing the yen’s exchange rate against the US dollar.
Since entering the rate hike cycle in 2022, the Federal Reserve has maintained a relatively hawkish stance, with the current benchmark interest rate remaining in the 5.25% to 5.5% range. However, as US inflationary pressures gradually ease, market expectations for the Federal Reserve to begin cutting rates in the second half of 2025 are heating up.
Once the Federal Reserve starts its rate cut cycle, the interest rate differential between Japan and the US will inevitably narrow, weakening the yield advantage of the US dollar and driving some capital flows into the yen and other currencies. Especially if the Bank of Japan continues to raise rates, further pushing up yen interest rates, the yen-to-US dollar exchange rate is expected to break away from the weak range above the 150 level.
The market generally believes that if the Federal Reserve implements rate cuts in 2025 and the Bank of Japan’s policy rate rises to 1%, the USD/JPY exchange rate range may shift from the current 150 to 160 range down to the range of 140-150.
Although the short-term trend of the yen’s exchange rate is being driven by rate hikes and changes in Federal Reserve policy, Japan’s economic fundamentals and fiscal conditions continue to cast uncertainty over its long-term trajectory.
First, Japan’s economic growth momentum remains weak. While corporate wage growth has improved, boosting domestic demand, overall economic growth still hovers at a low level of around 1%. If rate hikes proceed too quickly, they may put pressure on corporate financing costs, thereby suppressing investment and consumption and slowing the pace of economic recovery.
Second, Japan’s government debt level remains extremely high. According to the “Fiscal Monitor” released by the International Monetary Fund (IMF) in October 2023, Japan’s general government debt-to-GDP ratio was projected to reach 259% in 2024, the highest among developed economies. If policy rates rise above 1% in 2025, national bond interest costs will inevitably increase, further straining fiscal burdens and squeezing public spending capacity.
Based on the current policy backdrop and market expectations, the yen-to-US dollar exchange rate is expected to find support around the 150 level in the short term. With the Bank of Japan continuing rate hikes and expectations of Federal Reserve rate cuts strengthening, the yen may gain upward momentum. However, its long-term trend remains uncertain due to Japan’s sluggish economic growth and mounting debt pressures.
The table below briefly summarizes the main factors influencing the yen’s exchange rate trend:
| Factors of Influence | Short-Term Impact | Long-Term Impact |
| Bank of Japan Rate Hikes | Increase yen yields, supporting the exchange rate | If rate hikes are too rapid, they may suppress economic growth |
| Federal Reserve Rate Cut Expectations | Narrow the Japan-US interest rate differential, driving yen appreciation | The long-term trend of the US dollar remains driven by US economic performance |
| Japan’s Economic Fundamentals | Rebounding domestic demand supports short-term stability | Lack of growth momentum limits the yen’s long-term performance |
| High Debt Levels | Limited short-term impact | May increase fiscal pressure in the long term, affecting market confidence |
Overall, the yen’s exchange rate trend is at a critical turning point. The interplay between policy changes and economic fundamentals has significantly increased exchange rate volatility. Investors need to closely monitor policy developments from the Bank of Japan and the Federal Reserve and remain highly alert to Japan’s domestic economic situation and government debt levels in order to seize investment opportunities amid market changes.
*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.
Rate hikes and rate cuts refer to central bank adjustments to the benchmark interest rate, reflecting the direction of monetary policy.
Rate Hike (raising interest rates): The central bank increases the benchmark interest rate, which means higher borrowing costs for banks. Loans become more expensive, reducing the willingness of consumers and businesses to borrow, thus decreasing money circulation in the market. Rate hikes are usually aimed at controlling inflation and stabilizing the economy, especially when the economy overheats and inflationary pressures rise.
Impact: Higher rates increase loan interest rates, raising financing costs for consumers and businesses, which typically leads to reduced spending and may suppress economic activity. Meanwhile, deposit rates rise, making savings more attractive.
Rate Cut (lowering interest rates): The central bank lowers the benchmark interest rate, reducing borrowing costs for banks. Loans become cheaper, encouraging consumers and businesses to borrow, invest, and spend. Rate cuts are generally used to stimulate the economy, especially during recessions, insufficient demand, or rising unemployment.
Impact: Lower rates reduce loan interest rates, encouraging borrowing and spending by individuals and businesses, which may boost economic growth. However, excessive rate cuts may increase inflationary pressures.
In summary:Rate hike: raising interest rates, tightening monetary policy, controlling inflation.
Rate cut: lowering interest rates, easing monetary policy, stimulating the economy.
The Bank of Japan decided at its monetary policy meeting on January 24 to raise the policy rate from 0.25% to 0.5%. This was the first rate hike in six months, bringing the policy rate to its highest level in about 17 years. At its monetary policy meeting at the end of July 2024, the Bank of Japan raised the policy rate to 0.25%. The last time the Bank of Japan’s policy rate reached 0.5% was in October 2008.
Foreigners can obtain loans in Japan, but approval depends on various factors such as residency status, income level, credit history, and loan type. For foreigners with long-term residency and stable income, the likelihood of getting a loan is higher. However, for those with short-term residency or insufficient credit history, additional documentation or a guarantor may be required. If needed, it is advisable to consult specific banks’ loan policies to understand detailed requirements.
