JPY 50-Year Exchange Rate Evolution: Tracing Back from the 155 Low, Why Does It Continue to Face Pressure?

When Will the Yen Hit Its Bottom?

In November 2023, the USD/JPY exchange rate reached 151.94 during New York trading hours, marking the lowest point in 32 years since August 1990. Behind this figure lies Japan’s deep-rooted economic difficulties and the divergence in global monetary policies.

Looking at a 50-year timeline, the yen’s depreciation trend actually began in 2012. At the end of that year, the USD/JPY exchange rate hit a historic high of 80 yen per dollar, initiating a long-term depreciation cycle that has lasted over a decade. From 80 to 155, the yen has experienced nearly a 50% loss in value.

Three Major Factors Driving the Yen’s Continuous Decline

Long-term Overextension of Loose Monetary Policy

After the Abe government took office in 2012, it implemented aggressive quantitative and qualitative easing policies, injecting large amounts of liquidity into the market and deliberately suppressing the yen to boost exports. This policy has persisted to this day, with the Bank of Japan maintaining over ten years of negative interest rates, with no substantial reversal as of 2023.

In contrast, the Federal Reserve has gradually normalized its monetary policy since 2013, especially after entering an aggressive rate-hiking cycle in 2022, causing the US-Japan interest rate differential to widen sharply. When one country’s interest rates approach zero or turn negative, and the other’s rise above 4%, arbitrage flows naturally favor the higher-yielding currency, leading to the yen’s continued depreciation.

Structural Economic Challenges That Are Hard to Avoid

Japan’s aging population and shrinking workforce have become the norm, with sluggish private consumption growth limiting endogenous economic momentum. In 2022, Japan’s GDP was 546 trillion yen, only about 10% higher than ten years earlier at 495 trillion yen, with an average annual growth rate of less than 1%.

Meanwhile, Japan’s dependence on energy and food is as high as 88% and 63%, respectively. When global commodity prices rise, Japan’s trade deficit hits new highs, increasing yen supply and further pressuring the exchange rate.

Disparity Between Prices and Real Wages

Data from 2023 shows Japan’s core CPI has risen for 27 consecutive months year-over-year, reaching 2.5% in November, surpassing the Bank of Japan’s 2% target. However, real wages have declined for 19 consecutive months, and household consumption remains weak. This phenomenon of rising prices coupled with stagnant incomes reflects the underlying fragility of Japan’s economy.

Turning Points and Policy Adjustments in 2023

Frequent Government Interventions

In early September, when the yen depreciated to 147.82, the Japanese government issued a strong warning, indicating readiness to take “bold intervention” measures. Subsequently, in November, the Bank of Japan intervened again to stabilize the exchange rate. Although these interventions temporarily halted the depreciation trend, they cannot alter the broader policy divergence.

Volatile Economic Performance

In the first two quarters of 2023, Japan’s economy showed signs of vitality, with GDP growth of 2.7% and 4.8%, respectively. Markets were optimistic that Japan might emerge from the “lost 30 years.” However, in the third quarter, GDP plummeted to -2.1%, prompting the Cabinet Office to revise down the full-year forecast.

Stimulus Package of 17 Trillion Yen

In November, Japan announced its largest economic stimulus package since 2014, totaling over 17 trillion yen. The measures include income tax cuts, grants, extended energy subsidies, and more, aimed at combating inflation and boosting demand. This move has received backing from international organizations such as the IMF and the World Bank.

Key Variables Shaping the Yen’s Future Trajectory

Looking ahead to 2024 and beyond, the outlook for the yen primarily hinges on one core issue: whether the monetary policy paths of the US and Japanese central banks will reverse.

If the Fed officially ends its tightening cycle and begins cutting rates, while the Bank of Japan ends negative rates and starts raising interest rates, the US-Japan interest rate differential will be systematically narrowed, potentially leading to a strengthening yen and a weakening dollar. Conversely, if the interest rate gap remains at current levels, the yen will continue to face downward pressure.

Currently at a 32-year low, the yen presents potential arbitrage opportunities for traders. Yen-related currency pairs with high liquidity, such as USD/JPY, EUR/JPY, GBP/JPY, offer relatively large trading volatility and ample market depth.

Conclusion

The long-term depreciation of the yen reflects Japan’s structural economic difficulties and the divergence in global monetary policies. From a 50-year perspective, Japan has slid from high exchange rates in the 1980s to around 150 today. This is not just a numerical change but signifies a realignment of economic patterns. In the short term, the yen’s exchange rate will still be influenced by the relative strength of central bank policies; in the long term, whether Japan’s economy can achieve substantive improvement will be the fundamental factor determining its currency outlook.