The Japanese yen has been depreciating against the US dollar since 2011, a trend that has persisted for 15 years and shows signs of intensifying. Before 2024, market participants generally attributed the yen's decline to the Bank of Japan's negative interest rate policy, arguing that low rates spurred capital outflows, a logically sound explanation.
Since March 2024, the Bank of Japan has raised interest rates four times, lifting the benchmark rate from negative territory to 0.75%, marking a substantial shift. With the central bank pledging further rate hikes, conventional wisdom suggested the yen should appreciate significantly against the dollar under such monetary tightening. However, the opposite has occurred.
Today, USD/JPY reached a high of 159.67, just under 300 basis points shy of its all-time peak of 161.94 recorded in July 2024. From the time of the Bank of Japan's first rate hike in March 2024, when USD/JPY opened at 151.24, the pair has climbed to its current level of 159.39, indicating the yen has continued to weaken rather than strengthen.
The yen's depreciation against the dollar signals a steady outflow of domestic capital from Japan into international markets. As the yen is a funding currency and a safe-haven asset, capital leaving Japan suggests optimism about global economic recovery. However, over the past 15 years since 2011, the global economy has experienced several cyclical fluctuations, yet the yen has consistently depreciated. Therefore, equating yen weakness solely with global economic conditions may overlook deeper underlying factors.
A more plausible explanation is that even after recent hikes, Japanese interest rates remain significantly lower than those in the United States, prompting capital to seek higher yields abroad, thereby driving the yen lower. Nevertheless, this dynamic could shift as the Bank of Japan continues raising rates and the Federal Reserve begins cutting rates, potentially reversing the yen's one-sided decline.
The primary uncertainty lies in whether the Bank of Japan will sustain rate hikes as market expectations suggest. Although Japanese inflation has shown a notable rebound, structural challenges such as an aging population, sluggish wage growth, and limited labor mobility continue to constrain economic development. These persistent issues may explain why long-term capital remains hesitant to hold the yen.
On the technical front, the daily chart shows USD/JPY remains in a short-to-medium-term uptrend, trading within an ascending channel. The medium-term high stands at 159.44, closely aligning with the recent peak of 159.67, suggesting potential resistance and a risk of pullback. The medium-term low is at 152.08, which also marks the lowest point in nearly five months.
Rising tensions between the US and Iran have driven up international oil prices. Given Japan's heavy reliance on Middle Eastern oil supplies, sustained high oil prices could reignite imported inflation risks for Japan. This may strengthen the Bank of Japan's resolve to hike rates, potentially curbing the upward momentum in USD/JPY.