Since the beginning of 2024, the Bank of Japan has been slowly moving towards normalizing its monetary policy. Multiple interest rate hikes have significantly increased market attention on the future trend of the yen. With the yen-dollar exchange rate recently hovering around the 150 mark, the dynamics of rate hikes, the policy direction of the Federal Reserve, and Japan’s economic fundamentals are collectively shaping the yen’s exchange rate outlook.
As Japan’s domestic inflation level remains in the 2% to 3% range and wage growth shows significant recovery, expectations for a Bank of Japan rate hike have further intensified. Since adjusting the policy rate to 0.5% in January 2024, the market has widely anticipated that the central bank may initiate another rate hike within the year, with the interest rate level potentially exceeding 1% by year-end.
Former Bank of Japan Deputy Governor Hiroshi Nakaso recently stated publicly that Japan now has the foundation for continuous rate hikes. A policy rate above 1% might be considered a “neutral interest rate”—a level that neither stimulates economic overheating nor suppresses growth. The Bank of Japan’s previous research also indicated that the neutral interest rate is roughly between 1% and 2.5%.
If Japan’s interest rate level moves towards 1% or even higher, it will undoubtedly support the yen exchange rate. Especially against the backdrop of growing expectations for a Federal Reserve rate cut, the change in the Japan-U.S. interest rate differential will be a key factor influencing the yen-dollar exchange rate.
Since entering the rate hike cycle in 2022, the Federal Reserve’s policy stance has been relatively hawkish, with the current benchmark rate maintained in the 5.25% to 5.5% range. However, as inflationary pressures in the United States gradually ease, market expectations for the Fed to begin cutting rates in the second half of 2025 are growing.
Once the Federal Reserve begins its rate-cutting cycle, the Japan-U.S. interest rate differential is bound to narrow. This will weaken the U.S. dollar’s yield advantage, causing some funds to flow into other currencies like the yen. Particularly if the Bank of Japan continues to raise rates, further pushing up the yen’s interest rate level, the yen-dollar exchange rate is expected to break out of the weak range above the 150 mark.
The market generally believes that once the Fed implements rate cuts in 2025 and the Bank of Japan’s policy rate rises to 1%, the USD/JPY exchange rate range may shift downwards from the current 150-160 to the 140-150 range.
Although the yen’s short-term exchange rate trend is being driven by rate hikes and changes in Fed policy, Japan’s economic fundamentals and fiscal situation still create uncertainty for its long-term trajectory.
Firstly, Japan’s economic growth momentum remains weak. Although improvements in corporate wage growth have led to a recovery in domestic demand, the overall economic growth rate remains low at around 1%. If interest rates are raised too quickly, it could put pressure on corporate financing costs, thereby inhibiting investment and consumption and dragging down the pace of economic recovery.
Secondly, the Japanese government’s debt level is high. According to the Fiscal Monitor report released by the International Monetary Fund (IMF) in October 2023, Japan’s general government debt-to-GDP ratio was projected to reach 259% in 2024, the highest among developed economies. If the policy rate rises to 1% or more in 2025, the cost of national debt interest will inevitably increase, exacerbating the fiscal burden and further squeezing public spending.
Based on the current policy background and market expectations, the yen-dollar exchange rate is expected to bottom out around 150 in the short term. As the Bank of Japan continues to raise rates and expectations for a Fed rate cut grow, the yen may see some appreciation momentum. However, the long-term trend still requires vigilance regarding uncertainties brought by Japan’s sluggish economic growth and debt pressures.
The table below briefly summarizes the main factors affecting the yen’s exchange rate trend:
| Influencing Factor | Short-Term Impact | Long-Term Impact |
| Bank of Japan Rate Hike | Increases yen yield, supports exchange rate | If hikes are too fast, could suppress economic growth |
| Fed Rate Cut Expectation | Narrows Japan-U.S. interest rate differential, drives yen appreciation | Long-term dollar trend still dominated by U.S. economic performance |
| Japan’s Economic Fundamentals | Recovery in domestic demand supports short-term stability | Insufficient growth momentum constrains long-term yen performance |
| High Debt Level | Limited short-term impact | May exacerbate long-term fiscal pressure, affecting market confidence |
Overall, the yen’s exchange rate trend is at a critical turning point. The interplay of policy changes and economic fundamentals has significantly increased exchange rate volatility. Investors need to pay close attention to the policy movements of the Bank of Japan and the Federal Reserve, and remain highly vigilant about Japan’s domestic economic situation and government debt, in order to seize investment opportunities amidst market changes.
*The content of this article is for sharing and reference purposes only, and does not constitute professional investment advice. As individual circumstances and needs vary, you may contact the Cashback Island team or consult your financial planner for professional advice.
An interest rate hike or cut refers to the central bank’s adjustment of the benchmark interest rate, reflecting the direction of its monetary policy.
Rate Hike (Raising Interest Rates): The central bank raises the benchmark interest rate, which means the cost of borrowing for banks increases. This makes loans more expensive, reducing the willingness of consumers and businesses to borrow, thereby decreasing the money supply in the market. Rate hikes are typically used to control inflation and stabilize the economy, especially when the economy is overheating and inflationary pressures are high.
Impact: A rate hike causes lending rates to rise, increasing financing costs for consumers and businesses, which usually leads to reduced spending and may suppress economic activity. At the same time, deposit rates increase, making savings more attractive.
Rate Cut (Lowering Interest Rates): The central bank lowers the benchmark interest rate, which means the cost of borrowing for banks decreases. This makes loans cheaper, motivating consumers and businesses to borrow, invest, and spend. Rate cuts are generally used to stimulate the economy, especially during economic recessions, insufficient demand, and rising unemployment.
Impact: A rate cut lowers lending rates, encouraging individuals and businesses to borrow and spend, which can boost economic growth. However, if rate cuts are excessive, they can also lead to increased inflationary pressure.
In summary:
Rate Hike: Increases interest rates, tightens monetary policy, controls inflation.
Rate Cut: Lowers interest rates, loosens monetary policy, stimulates the economy.
The Bank of Japan decided at its monetary policy meeting on January 24 to raise the policy interest rate from 0.25% to 0.5%. This is the second rate hike by the Bank of Japan in six months, and the policy rate has reached its highest level in about 17 years. The Bank of Japan had previously raised the policy rate to 0.25% at its monetary policy meeting at the end of July 2024. The last time the Bank of Japan’s policy rate was at the 0.5% level was in October 2008.
Foreigners can get loans in Japan, but success depends on various factors such as residency status, income level, credit history, and the type of loan. For long-term residents with a stable income, the chances of getting a loan are higher. However, for short-term residents or those without a sufficient credit history, more supporting documents or a guarantor may be required. If needed, it is best to consult the specific loan policies of different banks to understand the detailed requirements.
