Why Is the Yen So Weak? Key Factors Behind Its Decline

The Japanese yen (JPY) has experienced significant depreciation in recent years, raising concerns among policymakers, businesses, and investors.

Traditionally considered a safe-haven currency, the yen has lost considerable value against major currencies like the U.S. dollar (USD) and the euro (EUR).

Why is the yen so weak? Monetary policy decisions, interest rate differentials, inflationary pressures, trade imbalances, and global investor sentiment are key factors in its decline.

The Role of Japan's Monetary Policy in the Yen's Weakness

One of the main reasons behind the yen's decline is Japan's ultra-loose monetary policy, which has kept interest rates near zero or even negative for decades. The Bank of Japan (BOJ) has hesitated to raise interest rates despite inflationary pressures, maintaining an accommodative stance to support economic growth.

In contrast, major central banks like the U.S. Federal Reserve and the European Central Bank (ECB) have implemented aggressive interest rate hikes to combat rising inflation. This divergence in monetary policies has widened the interest rate differential between Japan and other economies, leading investors to seek higher returns elsewhere.

In January 2025, the BOJ raised its short-term policy rate from 0.25% to 0.5%, marking the highest level in 17 years. However, this increase remains significantly lower than interest rates in the U.S. and Europe, where central banks have raised rates above 4% to control inflation. The U.S. Federal Reserve, for example, maintained interest rates between 4.25% and 4.50% in early 2025, making the U.S. dollar a far more attractive investment option than the yen. This persistent gap in interest rates has resulted in capital outflows from Japan, further weakening the yen.

The Impact of Interest Rate Differentials on the Yen

Interest rate differentials are crucial in currency valuation as investors move capital to countries offering higher returns. Thus, the yen has become less attractive to international investors due to its historically low interest rates.

One common trading strategy known as the "carry trade" has exacerbated the yen's decline. In a carry trade, investors borrow yen at low interest rates and invest in higher-yielding assets in other countries. This practice increases the supply of yen in global markets, driving its value down.

For instance, when the Federal Reserve raises interest rates, U.S. Treasury bonds become more appealing to investors seeking stable returns. As capital flows into U.S. assets, the demand for the dollar strengthens while the yen weakens. The widening interest rate gap has been a key driver of the yen's depreciation, making it one of the weakest-performing major currencies in recent years.

Japan's Trade Deficit, Inflation and Wage Growth

Japan's trade balance has historically affected the strength of the yen. For decades, Japan was known for running trade surpluses due to its strong export-driven economy, particularly in automobiles, electronics, and machinery. However, recent shifts in global trade dynamics have led to persistent trade deficits, contributing to why is the yen so weak.

One major factor affecting Japan's trade balance is the rising cost of energy imports. Japan relies heavily on imported oil and natural gas, and a weaker yen makes these imports more expensive. Yen's decline has also led to higher costs for businesses and consumers, increasing Japan's trade deficit. At the same time, the benefits of a weaker yen in boosting exports have been limited due to global economic slowdowns, supply chain disruptions, and weaker demand for Japanese goods in key markets.

Moreover, despite inflation exceeding the BOJ's 2% target for 35 consecutive months, real wage growth in Japan has remained stagnant. In December 2024, core consumer inflation in Japan accelerated to 3.0%, marking the fastest annual pace in 16 months. However, wage growth has not kept pace with rising prices, decreasing consumer purchasing power. Stagnant wages limit domestic spending and make it difficult for inflation to become self-sustaining, further complicating the BOJ's efforts to tighten monetary policy.

In contrast, other major economies have experienced rising inflation and increased wage growth, prompting their central banks to implement aggressive rate hikes. This has resulted in further yen's decline, as investors continue to favour currencies tied to economies with stronger inflation-adjusted returns.

Comparing Japan's Interest Rates to Other Major Economies

Japan has long been known for having some of the lowest interest rates in the world, but in early 2025, Switzerland took over that title. In February 2025, Switzerland's inflation rate was 0.3%, prompting the Swiss National Bank to set its interest rate at 0.25%, lower than Japan's 0.5% rate. However, despite this shift, the yen remains under pressure due to Japan's economic challenges and ongoing capital outflows.

The divergence between Japan's low interest rates and the higher rates in the U.S. and Europe continues to make the yen an unattractive investment. While the BOJ's recent rate hike signals a shift in policy, it is still far from reversing the long-standing trend of yen depreciation.

2025 Outlook for the Yen

The USD/JPY currency pair, representing the balance of power between the U.S. and Japanese economies, has turned into a battleground for bulls and bears. Since the beginning of 2021, the currency pair has been trading within a large uptrend, with current price levels hovering near 150.65. Given the ongoing economic uncertainty and the policy divergence between the Federal Reserve and the Bank of Japan, the yen's future remains uncertain.

A closer look at technical indicators suggests increasing bearish pressure on the yen. The technical analysis of the weekly USD/JPY chart highlights key support and resistance levels that can guide traders in planning their strategies for the coming year. The formation of Evening Star and Bearish Engulfing candlestick patterns reinforces the prevailing bearish sentiment, signalling a potential downward reversal. The MACD line's movement toward the zero threshold, along with declining RSI values and liquidity outflows indicated by the MFI, further strengthens the sell signal.

The primary trading scenario for 2025 suggests opening short positions below the 140.55 support level, targeting price ranges between 127.17 and 103.13. If the bearish momentum persists, the yen could experience further depreciation, dragging the USD/JPY pair toward lower levels. However, if bulls sustain the price above 140.55, an alternative scenario would involve long trades targeting 161.57–183.68, in line with the broader uptrend.

Conclusion

Ultimately, multiple factors contribute to why is the yen so weak currently. The BOJ's decision to maintain an ultra-loose monetary policy for years has made the yen less attractive to higher-yielding currencies like the U.S. dollar.

While recent interest rate hikes signal a potential shift, Japan’s economic challenges continue to weigh on the yen. The yen's long-term trajectory will depend on whether Japan can adapt its monetary policy, improve its trade balance, and stimulate sustainable wage growth. Until these factors change, the yen will remain under pressure, making it a key focus for global investors and policymakers alike.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.