In-depth Analysis: How the USD/JPY Relationship Affects Your Investment Returns

Japan, as the world’s second-largest economy, has the Japanese Yen (JPY) playing a significant role in the international financial markets. Whether it is hedge funds, central banks, or ordinary investors, no one can ignore the profound impact of the USD/JPY relationship on global markets. Especially in recent years, the Yen exchange rate has experienced volatile swings, directly affecting investment opportunities in Asia. This article will systematically analyze the characteristics of the Yen, the logic behind the USD/JPY trend, and how investors should seize this opportunity.

Why the Yen is the Third Largest Trading Currency in the World

The Yen code JPY is Japan’s legal tender and ranks third in international foreign exchange trading volume, after the US dollar and the euro. This status is not accidental but stems from Japan’s stable economic foundation and its unique market position.

In the forex market, USDJPY is one of the most traded currency pairs, ranking second globally. This means that any fluctuation in the USD/JPY relationship can trigger a chain reaction of global capital flows. Due to its high trading volume, the bid-ask spread for this pair is minimal, which is a significant advantage for professional traders.

The Yen’s Safe-Haven Attribute and the Low-Interest Rate Trap

Japan has been in a low-interest-rate environment since the 1990s, which is a core reason why the Yen has become a global safe-haven currency. During international turmoil or investor panic, capital flows heavily into the Yen, pushing its exchange rate higher. This safe-haven characteristic gives the Yen a unique market appeal.

At the same time, Japan’s long-term low-interest-rate policy has fostered a “carry trade” investment strategy—investors borrow Yen at extremely low costs and then invest in higher-yield assets. This cycle once fueled the prosperity of global arbitrage trading but also concealed significant systemic risks.

It is worth noting that the Yen shows a high correlation with other Asian currencies. When the Yen depreciates, other Asian export countries are also forced to devalue their currencies to maintain competitiveness. This “contagious” devaluation has become especially evident during the escalation of global trade tensions.

Key Factors Determining the USD/JPY Relationship

Over the past thirty years, the Bank of Japan has almost never raised interest rates substantively, relying instead on quantitative easing (QE). This policy stance has had a profound impact on the USD/JPY relationship.

2015-2020: A Relatively Stable Period

During this period, Japan and the US engaged in roughly similar QE speeds, and US interest rates gradually declined. As a result, the US dollar gradually depreciated against the Yen, maintaining a relatively balanced USD/JPY relationship.

2021-2024: Yen Depreciation in Large Scale

The situation sharply reversed after the COVID-19 outbreak in 2020. The US implemented the most aggressive QE in history to respond to the pandemic, doubling the dollar liquidity in a short period. Meanwhile, the Bank of Japan also increased QE efforts. This “opposite movements” scenario led to a continuous depreciation of the Yen.

By early 2024, USD/JPY briefly broke through 160, reaching a 38-year low. While this benefits Japan’s export sector, it also exerts inflationary pressure on the Japanese economy, ultimately prompting the Bank of Japan to raise interest rates in July.

New Variables After Trump’s Election

After the 2024 US presidential election results were announced, the USD/JPY relationship faced new uncertainties. Trump’s promised tariffs and tax cuts could boost US inflation, delaying the Federal Reserve’s rate cuts. This supports the US dollar, putting continued downward pressure on the Yen.

On the other hand, if the Bank of Japan continues to raise rates in 2025 to combat inflation, the US-Japan interest rate differential may gradually narrow, which could support Yen appreciation. However, given the current political and economic environment, the Yen’s upside is limited. As an export-oriented country, Japan’s government prefers to keep its currency weak to stimulate exports.

Market Institutions’ Forecasts for USD/JPY

Various international financial institutions have differing views on the future trend:

Trading Economics predicts USDJPY will reach 160.8 by the end of 2024, rising to 162.3 in Q1 2025.

Longforecast believes the exchange rate will fluctuate between 150-170 over the next three years.

HSBC forecasts USD/JPY will reach 160 by mid-2025, reflecting a US dollar appreciation trend.

Barclays predicts 158 by March 2025, indicating short-term Yen weakness.

Morgan Stanley holds a different view, forecasting USD/JPY will fall to 140, based on US economic slowdown and Fed rate cut expectations.

These forecasts reveal significant divergence in market outlooks for USD/JPY, and investors should closely monitor policy developments and economic data.

Five Key Indicators Affecting Yen Trends

1. US Treasury Yields

US Treasury yields and the Yen are both safe-haven assets competing for capital. When US yields rise, investors tend to hold US Treasuries, reducing the Yen’s attractiveness; conversely, the opposite occurs.

2. US Monetary Policy

Whether raising or cutting rates, US policy adjustments are much more significant than Japan’s. Therefore, the USD/JPY relationship is largely determined by the Federal Reserve’s decisions. The delay in the Fed’s rate cut schedule in 2024 is a primary driver of Yen depreciation.

3. International Trade Patterns

Currencies are essentially commodities, with prices determined by supply and demand. If global demand for Japanese goods increases, the Yen appreciates; if Japan’s imports increase, the Yen depreciates. Currently, Japan’s strong exports provide support for the Yen.

4. Domestic Economic Trends in Japan

Japan’s long-term low interest rates stem from economic weakness. However, recently, the Japanese stock market hit record highs, and corporate exports surged, which could trigger inflation and prompt the Bank of Japan to accelerate rate hikes. If this expectation materializes, Yen appreciation potential will open up.

5. Bank of Japan Policy Stance

Over the past 30 years, the BOJ’s policy trajectory has been QE, and the market has formed fixed expectations. If the central bank deviates from this (e.g., stops QE), short-term exchange rate volatility can be quite intense. Therefore, tracking BOJ policy movements is crucial for short-term traders.

Three Main Ways to Invest in Yen

Method 1: Bank Cash Exchange

This is the most traditional way to participate in Yen, suitable for investors with actual exchange needs (e.g., travel to Japan). From an investment perspective, the large bid-ask spread and the need for substantial capital make it less suitable for pure investment purposes.

Method 2: Yen-denominated Financial Products

Purchasing Japanese stock funds, Japanese government bonds, or directly investing in Japanese stocks are alternative ways to participate in Yen appreciation. However, this requires investors to monitor both exchange rate fluctuations and stock price movements, with higher entry barriers, more suitable for experienced investors.

Method 3: Forex Margin Trading

This is the most efficient way to participate in Yen fluctuations. Investors do not need to hold Yen physically but only track USD/JPY movements to profit from exchange rate differences. This method allows both long and short operations, with leverage to amplify gains, and has low costs. However, leverage is a double-edged sword, capable of magnifying losses, so strict risk management is essential.

Essential Preparations Before Yen Investment

Before entering trading, novice investors should:

First, start with basic knowledge, understand the fundamental logic of USD/JPY, and grasp the main factors influencing exchange rates.

Second, develop a trading plan, clearly define investment goals, risk tolerance, and capital size. Leverage trading carries high risks and should not be over-invested.

Third, choose appropriate trading times. The most active USD/JPY trading hours are from 8:00 PM to 11:00 PM Taiwan time, when liquidity is highest and spreads are narrow.

Finally, continuously monitor policy developments. BOJ meetings, Fed decisions, economic data releases—all directly impact USD/JPY trends. Investors must stay alert.

Common Questions About Yen Investment

Q: Why is the Yen considered a safe-haven currency?

A: Japan’s economy is stable, with high policy transparency, fostering investor confidence. Additionally, during global financial turmoil, capital naturally flows into the Yen. Lastly, Japan’s low-interest-rate environment makes Yen an important tool for arbitrage trading.

Q: When is the best time to trade USDJPY?

A: The peak trading hours are from 8:00 PM to 11:00 PM Taiwan time, when US traders are most active, liquidity is highest, and bid-ask spreads are narrow.

Q: How should beginners start Yen investment?

A: It is recommended to proceed gradually. Start with currency exchange at banks to understand basics, then move to Japanese stock funds, and after familiarizing with financial asset volatility, consider forex margin trading. Regardless of the method chosen, prior research and risk assessment are essential.