“The Yen”
- Historical and Structural Perspectives
~The Yen’s Depreciation Trend May Persist ~

The USD/JPY exchange rate can move either toward yen appreciation or depreciation in the short term, as it is influenced by Japan-U.S. monetary policy, interest-rate differentials, and expectations regarding foreign-exchange intervention. From a medium- to long-term perspective, however, the long-standing yen-appreciation trend that had continued since the 1970s has come to an end, and the yen has shifted to a depreciation trend since Abenomics; the likelihood is rising that this trend will be prolonged.

Looking back at the very long-term evolution of the yen’s value since the Meiji era, the exchange rate was initially USD 1 = JPY 1 from the Meiji period through the prewar years, but the yen generally followed a depreciation trend and stood at around USD 1 = JPY 4–5 immediately before World War II. After the war, the yen started from a fixed exchange rate of USD 1 = JPY 360 and shifted to a floating exchange-rate regime in the 1970s. In 2011, it reached USD 1 = JPY 75. In other words, the yen’s value followed a history in which it depreciated to roughly one-fourth to one-fifth over about 70 years before the war and, after a sharp devaluation caused by defeat in the war, appreciated four- to fivefold over about 70 years after the war. Since the start of Abenomics in 2012, however, yen depreciation has continued up to the present.

The yen’s current level is around its lowest in approximately half a century in terms of the real effective exchange rate. From the perspective of purchasing power parity, although the theoretical level would be around JPY 70–100 to the dollar, the actual exchange rate is significantly weaker than that. From the postwar period through 2020, the market exchange rate was often positioned on the yen-appreciation side relative to purchasing power parity, and consumer price-based purchasing power parity functioned as a kind of resistance line during phases of yen depreciation. Since 2020, however, this relationship has been breaking down, and yen depreciation beyond purchasing power parity has become the norm.

Looking ahead, the Bank of Japan is strengthening its monetary tightening stance, and the yen’s depreciation trend is expected to pause in the short term. Over the medium to long term, however, several factors are expected to exert depreciation pressure on the yen: the widening deficit in the balance of digital-related services; the weak domestic repatriation of earnings from overseas securities and direct investment, reflecting reinvestment abroad; the widening deficit in the secondary income balance due to reinsurance premiums associated with natural disasters and remittances by foreign workers; and dollar demand arising from Japan’s pledge to invest USD 550 billion in the United States during negotiations over Trump tariffs. The expansion of inbound tourism receipts may be a factor supporting yen appreciation, but supply constraints limit its capacity to underpin the yen. In addition, wavering confidence in the U.S. dollar as the international key currency is adding uncertainty to the outlook for the yen.

For both companies and the government, it is important to formulate strategies based on the possibility that the long-term trend will continue to be yen depreciation. At the same time, a currency is also a barometer of a country’s national strength. Japan should make efforts to enhance the value of the yen by advancing structural reforms aimed at strengthening export capacity and increasing inward investment, thereby putting a brake on one-sided yen depreciation. Excessive yen depreciation and excessive yen appreciation alike are detrimental to the Japanese economy. To stabilize the value of the currency, fiscal policy, growth strategy, and monetary policy will need to be coordinated effectively.

In recent years, the economic environment has changed substantially, and the same events as in the past will not necessarily recur. Still, it is often said that “history does not repeat itself, but it rhymes.” As the global economy undergoes dramatic change amid developments such as Trump tariffs, currency policy and exchange-rate strategy require humility in learning from history and a long-term perspective.

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