The depreciation of the yen has not ended yet

The yen exchange rate against the US dollar is hovering in the range of 1 dollar to 145 yen, and the depreciation of the yen above 150 yen seems to have ended. But it is only the depreciation of the US dollar that has pushed up the yen exchange rate, and the depreciation of the yen has not completely ended. The root cause lies in “Japan’s weakness”, and whether this can be changed will determine the real reversal of the depreciation of the yen.

“Although it cannot be determined yet, there may be transactions related to the acquisition of Nippon Steel in the foreign exchange market,” a foreign exchange broker of a Japanese bank recalled. Nippon Steel’s acquisition of U.S. Steel was officially completed on June 18, and the acquisition fee was paid for about US$14.1 billion (about 2 trillion yen). Nippon Steel’s purchase of US dollars to pay for this money is one of the focuses of the foreign exchange market.

The above broker believes that “the yen depreciated by 4 yen in the two days starting from May 27. There were also two days of fluctuations of about 2 yen in early June. Funds may flow at this level.” Although not all of it comes from transactions in the foreign exchange market, if we look at the scale of 2 trillion yen, it is equivalent to the foreign exchange intervention of the Bank of Japan to buy yen on July 12, 2024 (2.367 trillion yen).

In the foreign exchange market, at first glance, the yen is appreciating. The yen-dollar exchange rate shows the changes in the relative value of the yen and the dollar. The reasons for the appreciation of the yen against the dollar are divided into “yen appreciation factors” and “dollar depreciation factors”.

The latter has dominated the appreciation of the yen against the dollar since the beginning of 2025. Affected by the US tariff policy, the global trend of re-evaluating asset allocations that are biased towards the US dollar has strengthened, and the US dollar has depreciated alone. The US dollar index, which shows the strength of the US dollar against major currencies, once fell 9% from the end of 2024, hitting a three-year low.

Kensuke Niihara, chief investment officer (CIO) of State Street Global Advisors, pointed out that “the actual exchange rate of the US dollar has been historically high in recent years. After President Trump took office, the US dollar had a “reason to sell”, and the adjustment of the appreciation of the US dollar began.”

The appreciation of the yen against currencies other than the dollar is minimal. On June 20, the yen hit its lowest level against the euro since July 2024, and against the Swiss franc and the New Taiwan dollar since the beginning of 2025.

The Bank of Japan (central bank) raised interest rates in January. Rate hikes usually lead to currency appreciation. During this period, speculative funds’ yen purchases swelled to a record high, but “the yen’s exchange rate against currencies other than the dollar did not appreciate incredibly” (another broker at a Japanese bank).

One of the reasons for the yen’s depreciation after 2021 is the “structural yen selling”. The deep-rooted reason is the direct investment made by Japanese companies such as Nippon Steel Mergers and Acquisitions to develop overseas business.

The buying and selling of speculative funds will inevitably be accompanied by reverse transactions in the future, and it is difficult to determine the direction of the market. However, direct investment is not prone to reverse transactions, which will form a one-way yen selling pressure.

Statistics from the Ministry of Finance of Japan show that from the perspective of outward direct investment in 2024, the net investment obtained by deducting recovery from actual execution is 32 trillion yen, a record high. Outbound investment has reached 2.6 trillion yen per month, while domestic investment is around 300 billion yen per month, a huge gap.

Shusuke Yamada, chief Japanese foreign exchange and interest rate strategist at Bank of America Securities, said, “If global economic uncertainty increases, Japanese companies may strengthen their defensive posture and focus on domestic equipment investment and shareholder returns. But in the long run, Japan’s low birth rate and aging population will promote corporate overseas investment.”

The Japanese government has set a goal of increasing the balance of direct investment in Japan to 150 trillion yen in the “Basic Policy for Economic and Fiscal Operation and Reform”. According to data from the United Nations Conference on Trade and Development (UNCTAD), as of 2023, Japan’s inbound direct investment balance will be 5.9% of gross domestic product (GDP), the fourth smallest in the world. By the end of 2024, the balance of direct investment in Japan will be only 53 trillion yen.

Daisuke Karakama, chief market economist at Mizuho Bank, pointed out that “M&A accounts for only about 40% of Japan’s inward direct investment, which is lower than the overall level of developed countries (about 60%). Allergic reactions to overseas acquisitions and laws and regulations have become the reasons for the weak growth of inward direct investment.”

Japan’s potential growth rate, which shows its economic strength, is in the 0% range, and the average growth rate of real GDP in the past 10 years is 0.5%, which is particularly low among the Group of Seven (G7). As Japanese companies go overseas to seek sources of growth, how can they use the depreciation of the yen to attract overseas investment to Japan? In order to avoid the reversal of the depreciation of the yen remaining only at the “superficial” appreciation against the US dollar, it is becoming increasingly important to attract funds that continue to flow overseas back to Japan.