The Japanese yen has recently plunged to multi-decade lows against the US dollar, with the USD/JPY currency pair extending its bullish run well into 2025. This dramatic depreciation in the yen has captivated the attention of forex traders, investors, and policymakers alike. In this comprehensive analysis originally authored by Crispus Nyaga and published on Invezz, we explore the reasons behind the yen’s sharp decline, the broader macroeconomic factors at play, and where the USD/JPY might be headed next.
Overview of the Yen’s Decline
Over the past several months, the Japanese yen has weakened significantly relative to the US dollar, pushing the USD/JPY exchange rate to its highest levels since the 1980s. At the time of writing, the currency pair hovers above 150, a level that has historically prompted concern among Japanese monetary authorities. Yet this current weakening appears more driven by persistent macroeconomic disparities and diverging monetary policy approaches between the United States and Japan than by short-term market speculation.
Key Highlights:
– USD/JPY has surged past the 150 mark, reaching levels not seen in decades.
– The pair has continued rising due to fundamental macroeconomic differences.
– Japan’s central bank appears to be resisting the global trend of tightening monetary policy.
– Currency interventions by Japanese authorities have failed to produce lasting results.
– Some analysts argue that the yen has become one of the most undervalued G10 currencies.
Diverging Central Bank Policies: Fed and BOJ
The most prominent driver of the USD/JPY uptrend is the stark divergence between the monetary policies of the US Federal Reserve and the Bank of Japan (BOJ). While many central banks around the globe have adjusted interest rates in response to persistent inflation, the BOJ has maintained its ultra-accommodative stance.
Federal Reserve Policy:
– Since 2022, the Fed has aggressively hiked its benchmark interest rates.
– US inflation data has remained above the Fed’s long-term target of 2%, prompting further tightening.
– The Federal Funds Rate now sits in the range of 5.25% to 5.50%.
– US Treasury yields have risen sharply, with 10-year yields hovering around 4.6% as of November 2025.
– This rise in yields attracts capital inflows into US assets, strengthening the dollar.
Bank of Japan Policy:
– The BOJ has resisted raising interest rates despite global inflationary pressure.
– Policymakers argue that Japan has yet to reach a sustainable inflation target of 2%.
– Yield curve control (YCC) remains an active tool used to cap long-term government bond yields.
– The BOJ’s dovish stance weakens the yen by discouraging capital inflows.
This policy divergence has established a strong fundamental backbone for the continued rally in USD/JPY. Higher US yields relative to Japanese assets make the dollar more attractive on a global scale.
Japan’s Struggle with Inflation and Wages
Unlike in the United States and Europe, inflation in Japan has traditionally been subdued. Even as global commodity prices surged and supply chain disruptions pushed prices higher elsewhere, Japan’s economy remained sluggish. Consumers have long been conditioned to expect low prices, while stagnant wage growth has capped domestic demand.
Key Challenges in the Japanese Economy:
– Wage growth remains tepid, failing to keep pace with rising prices.
– Although headline inflation has picked up in recent months, core inflation remains well below the BOJ’s target.
– Japanese companies are hesitant to raise salaries permanently due to long-standing deflationary psychology.
– Demographic trends, including a shrinking and aging population, have curbed consumption and economic growth.
These domestic challenges have limited the Bank of Japan’s ability to normalize its monetary policy framework. Without sustainable demand-led inflation, the BOJ is cautious about raising interest rates prematurely.
Attempts at Currency Intervention
Faced with the rapid depreciation of the yen, Japanese policymakers have responded with verbal and direct market interventions. However, these efforts have thus far
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