Yen 32-year low: A decade of sharp depreciation from historical highs

The Japanese Yen is facing unprecedented downward pressure. In November 2023, the USD/JPY exchange rate fell to 151.94, the lowest in 32 years since 1990. To fully understand how the Yen has fallen from its former status as a strong currency to a historic low, we need to look back to the turning point a decade ago.

A Decade of Depreciation: From 80 Yen to 151 Yen

At the end of 2012, the USD/JPY exchange rate reached a level of 80 yen per dollar, which was also the limit of Yen appreciation. However, afterward, the Bank of Japan began implementing aggressive easing policies, causing the Yen to turn downward and start a ten-year depreciation journey.

From 2012 to 2024, the Yen depreciated from around 80 to near 150 against the dollar, with an overall decline of over 80%. This decade was not a steady fall but occurred in several distinct phases:

Phase 1 (2013-2015): Rapid Yen depreciation. In 2013 and 2014, the Yen depreciated by 18% and 12%, respectively. By June 2015, the USD/JPY rate had risen to 126. The main drivers during this period were the large-scale economic stimulus measures implemented by the Abe government, the Bank of Japan’s massive government bond purchases injecting liquidity into the market, and the Federal Reserve beginning to end its quantitative easing, which strengthened the dollar and further pressured the Yen.

Phase 2 (2016): Another wave of depreciation. After the Fed raised interest rates, capital flowed heavily into the US, causing the Yen to plunge from 100 in September to around 120 in December.

Phase 3 (2022-2023): The most intense decline. In just over a year, the Yen depreciated from 115 at the start of the year to below 150 by year-end, a decline of over 30%. This was a crisis-level depreciation approaching historical lows.

The Three Main Drivers Behind Yen Depreciation

The widening US-Japan interest rate differential is the most direct cause. In 2022, the Fed launched an aggressive rate hike cycle, raising the benchmark rate from zero to over 5%. Meanwhile, the Bank of Japan faced a policy dilemma: despite rising domestic inflation, it hesitated to tighten significantly due to economic fragility. In early 2023, the Yen briefly rebounded to 127, but the BOJ refused to follow suit with rate hikes, and the dollar reasserted strength, pushing the Yen back into depreciation.

Structural economic decline in Japan is irreversible. Japan faces long-term issues such as negative population growth, aging demographics, and shrinking workforce. In 2023, Japan’s GDP continued to slide relative to other developed countries, with weak consumer spending and insufficient corporate investment. These factors erode market confidence in Japan’s economic outlook.

High dependence on energy and food imports worsens trade balance. Japan’s energy import dependency is 88%, and food dependency is 63%. During 2022-2023, global energy and food prices soared, leading to record-high trade deficits for Japan, which in turn exerted downward pressure on the Yen.

Key Events of 2023

September FX intervention: When the Yen fell to 147.82, the Japanese government intervened for the first time since 1998, signaling a strong stance.

GDP data volatility: Japan’s economic performance fluctuated. Q1 GDP grew by 2.7%, Q2 surged to 4.8%, but Q3 suddenly contracted by -2.1%. These large swings reflect economic instability.

November economic stimulus plan: The Japanese government announced a stimulus package exceeding 17 trillion yen, the largest since 2014, including tax cuts, subsidies, and energy support. International organizations like the IMF and World Bank approved the plan.

The CPI and real wages paradox: In November, Japan’s core CPI reached 106.4, up 2.5% year-over-year, rising for 27 consecutive months and surpassing the BOJ’s 2% target. However, real wages declined for 19 consecutive months, and actual consumption continued shrinking, creating a conflicting situation that troubles BOJ policy decisions.

Market Mechanisms Behind the Yen’s Historic Highs

Understanding the journey from the Yen’s historic highs to its current lows hinges on recognizing that exchange rates reflect not only economic fundamentals but also central bank policy stances. When the Yen appreciated to 80, Japan’s export competitiveness was severely impaired, leading to economic distress, which prompted policy reversal. Today, with the Yen near 150, although the BOJ benefits from export stimulation, it faces the costs of rising import inflation and shrinking real wealth.

From a strong position at its peak to its current weakness, the Yen has completed a full policy cycle.

Outlook for 2024 and Investment Considerations

Entering 2024, the Yen’s direction will mainly depend on shifts in monetary policy by both the US and Japanese central banks. Current market expectations are:

If the Fed ends its tightening cycle and begins to cut rates, and the BOJ ends its negative interest rate policy and starts raising rates, the US-Japan interest rate gap will narrow significantly, potentially reversing the Yen’s trend. This could lead to Yen appreciation and a weaker dollar.

If the Fed’s rate cuts are insufficient or the BOJ hesitates to hike, the Yen may continue under pressure, with the dollar remaining strong.

The Yen, currently at a historic low, offers traders a clear range-bound trading opportunity. Common Yen-related trading pairs include: USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY, etc. These pairs are highly liquid with moderate volatility, suitable for traders with different risk preferences.

Traders should base their strategies on judgments about the US and Japan’s monetary policies and technical support levels. However, forex trading involves leverage risks, so strict risk management and stop-loss plans are essential.

Conclusion

The Yen has fallen from its 2012 all-time high to a 32-year low in 2023, primarily due to Japan’s long-term economic decline and passive policy responses. While a decade of depreciation has indeed stimulated exports, it has also brought side effects such as rising import costs and declining real wages—classic “depreciation begets depreciation” traps.

A reversal of the Yen will require both a US rate cut and a Japanese rate hike to occur simultaneously, depending on the evolution of the global economic situation. For investors, the current low Yen levels present a clear operational opportunity, provided they have accurate expectations of central bank policies.