In 2024, the sustained depreciation of the Japanese yen against the US dollar has become a hot topic in the international financial markets. The monetary policy decisions of the Bank of Japan, economic data from the United States, and divergent global monetary policies have all contributed to the yen's depreciation trend.

As of April 27th, the Japanese yen has fallen below 158 yen per US dollar, marking a 34-year low. Since March, the yen has depreciated by 10% against the US dollar, making it the worst performer among G10 currencies. At the same time, the yen has also dropped below 169 yen per euro, indicating that the yen's depreciation is not limited to the US dollar but is weakening against a basket of currencies.

source：Investing
Data as of April 28, 2024.

The Background of Yen Depreciation
The Bank of Japan's decision on April 26th to maintain its current low-interest-rate policy, with the policy rate target staying between 0 to 0.1%, exacerbated the yen's downward pressure. Concurrently, the US core PCE price index for March rose by 2.8% year-on-year, slightly surpassing market expectations, bolstering market anticipation for the Federal Reserve to maintain its high-interest-rate policy, thereby strengthening the US dollar. Additionally, diminished expectations of interest rate cuts by the Federal Reserve and concerns about sticky inflation in the United States led investors to favor US dollar assets, further driving the depreciation of the yen.

source：tradingeconomics
Data as of April 28, 2024.

The Structural Issues Affecting the Depreciation of the Japanese Yen
1.Dependency on Energy and Import Demand:
Japan exhibits high dependence on imports for energy, food, and raw materials. The closure of domestic nuclear power plants following the Fukushima nuclear disaster in 2011 significantly increased the demand for energy imports. The slow process of nuclear power restarts has failed to effectively alleviate this issue, exacerbating pressure on the yen's depreciation.

2.Trade Imbalance:
A persistent trade deficit in both goods and services is another critical issue for Japan. From the fiscal year 2021 to 2023, Japan has experienced consecutive deficits in goods trade, while the deficit in services trade has become more prominent against the backdrop of developments in artificial intelligence technology and increasing overseas service expenses.

3.Overseas Investments and Capital Outflows:
Despite lucrative returns from overseas investments by Japanese companies, there has been a decline in capital repatriation back to Japan. Weak domestic demand and labor shortages have diminished the incentive for companies to reinvest profits domestically, leading to a preference for retaining profits overseas, further weakening the yen's international standing.

4.Economic Impact and Market Responses:
The depreciation of the yen has had multifaceted effects on the Japanese economy. Firstly, depreciation has increased the cost of imported goods, leading to a decline in purchasing power for domestic consumers and three consecutive quarters of negative growth in personal consumption. Secondly, while depreciation benefits the international competitiveness of Japanese export products, real wage income for Japanese citizens has not increased, restraining consumer purchasing willingness and posing challenges for businesses facing insufficient demand. Additionally, Japan's heavy reliance on imports of essential resources such as energy, food, and raw materials has led to a continuous increase in demand for the US dollar, further exacerbating pressure on the yen's depreciation.

Economic Impact and Market Response
Japanese Finance Minister Shunichi Suzuki has indicated that the government will not rule out any options to address the depreciation of the yen, hinting at possible intervention in the foreign exchange market. Meanwhile, although the Japanese stock market has shown strong performance, it is primarily driven by participation from foreign institutional investors, and domestic purchasing power has not been boosted.

International concerns about the depreciation of the yen have also been expressed. US Treasury Secretary Janet Yellen emphasized that exchange rates should be determined by the market, with intervention only occurring in extremely rare circumstances. Currently, concerns about the depreciation of the yen and the South Korean won have been raised by the finance ministers of Japan, the US, and South Korea, although no specific solutions have been proposed.

Future Trends in the Depreciation of the Yen:
1.Short-term Trends:
In the short term, the depreciation trend of the yen may continue, especially against the backdrop of the Federal Reserve's continued maintenance of a high-interest-rate policy. Additionally, if Japan's trade deficit and energy import demand are not effectively addressed, the yen may continue to face downward pressure.

2.Medium- to Long-term Forecast:
In the medium to long term, the direction of the yen will depend on various factors. Changes in the monetary policies of the Federal Reserve and other major economies, the global economic environment, and domestic economic reforms in Japan could all impact the yen. If Japan can effectively address its trade deficit, increase energy self-sufficiency, and promote capital inflows, the yen may gradually stabilize and regain its value.

3.Policy Adjustments and Market Intervention:
Policy adjustments by the Japanese government and central bank will be crucial in influencing the direction of the yen. If the Bank of Japan decides to adopt a tighter monetary policy, or if the government takes measures to reduce the trade deficit and increase energy self-sufficiency, it could provide support for the yen. Additionally, market attention remains focused on potential currency market interventions by the Japanese government, which could significantly impact the yen exchange rate in the short term.

The sustained depreciation of the yen is the result of various factors, including the monetary policies of the Bank of Japan, US inflation data, the Federal Reserve's aggressive interest rate hikes, and structural issues within the Japanese economy. While the yen may face further depreciation pressure in the short term, policy adjustments by the Federal Reserve and the Bank of Japan are expected to contribute to the appreciation of the yen in the long run. However, Japan's long-standing structural issues, such as reliance on imported resources, trade deficits, and an aging population, will continue to have profound effects on the yen exchange rate and the domestic economy.

With the significant softening of the yen against the US dollar prompting global investors' close attention, the foreign exchange market has witnessed a surge in active trading. The uSMART platform offers a diverse range of yen currency pairs for trading, combined with real-time market analysis and advanced trading tools, to assist you in accurately seizing investment opportunities.

How to place a trade on uSMART mobile application:
After logging into the uSMART SG APP, click on "Discover" at the top right corner of the page. Under the "Major Currencies" section, select "USD/JPY" to access the details page where you can view trading information and historical trends. Then, click on "Forex Trading" at the bottom right corner and choose the "Buy/Sell" function. Finally, select the quantity and validity period before submitting the order. See the image guide below for visual instructions:

This diagram is provided for illustrative purposes exclusively

Follow us

Find us on Twitter, Instagram, YouTube, and TikTok for frequent updates on all things investing.

Have a financial topic you would like to discuss? Head over to the uSMART Community to share your thoughts and insights about the market! Click the picture below to download and explore uSMART app！

Important Notice and Disclaimer:
We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.
This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.
The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.
This advertisement has not been reviewed by the Monetary Authority of Singapore