The Truth Behind the Yen’s Fall to its Lowest Point in 30 Years

Setsuo Otsuka: Amid global markets’ over-betting on a de-escalation of tensions in the Middle East, the “buy the dollar during turmoil” trend in the foreign exchange market is waning. Looking at the yen’s exchange rate, its fluctuations against the dollar are sluggish, but against a broad range of other currencies, selling pressure is actually increasing.

“Whether it’s safe-haven demand or increased risk appetite, the yen is being sold off,” and “Whether the dollar appreciates or depreciates, the yen depreciates.” Why is this troubling situation occurring?

Observing the trends of the dollar index and US crude oil futures, which show the strength of major currencies, makes this clear. The dollar index rose in tandem with oil prices, and then began to decline as the upward momentum of oil prices ended.

What about the yen? Comparing the yen and the dollar by the Nikkei Currency Index, one of the nominal effective exchange rates that shows the overall strength of various currencies against a broad range of targets, we find that the dollar has also turned downward, while the yen has remained unchanged in its weakening trend.

The yen’s index fell to 68.1 on April 13 (with 2020 as 100), a new low since January 1995.

Nominal effective exchange rates calculated by the Bank for International Settlements (BIS), based on 27 currencies with daily data available since the 1980s, also hit a record low since August 1990 as of April 14.

The yen’s exchange rate against the dollar has not yet fallen below the 37.5-year low reached in July 2024, at 161.90 yen to the dollar. In terms of overall value against a broad range of currencies, the yen has already depreciated further and is in the “super-yen depreciation” range.

What exactly happened? The Nikkei currency index ranks the changes in March and April based on pessimistic and optimistic exchange rates. The dollar appreciated the most among all 25 currencies in March, but depreciated the most in April. This also reflects the dramatic change in the exchange rate environment.

In March, Asian currencies, including the yen, heavily reliant on Middle Eastern energy purchases, depreciated significantly. Conversely, in April, risk currencies, primarily from emerging market countries, saw the largest appreciations.

The yen, having long lost its “safe-haven” status, was further impacted by the deteriorating import environment in March, leading to a sell-off, primarily against the dollar. In April, the yen also became a target of speculative carry trades involving the purchase of high-interest-rate currencies, experiencing a broad sell-off against various currencies.

The problem lies ahead. With the temporary easing of rising oil prices, speculative yen depreciation is manageable. It also provides the Japanese Ministry of Finance with room to intervene by buying yen. However, the risk of a breakdown in negotiations leading to a resurgence of rising oil prices and increased market caution remains high.

Especially when rising oil prices and a strengthening dollar simultaneously intensify, Japanese import inflation will be exacerbated by both international prices and the yen’s exchange rate, accelerating price increases. The increased amount of yen sold by Japan for imports could also lead to a vicious cycle of further yen depreciation.

Historically, the US dollar and crude oil prices have often moved in opposite directions, generally considered to have a negative correlation.

Within the “petrodollar” framework, where crude oil is settled in US dollars, a stronger dollar inflates the purchase price in local currencies for oil-importing countries outside the US, cooling demand for crude oil. Conversely, a weaker dollar undervalues ​​oil prices, increasing demand. This adjusting function is inherent.

An analysis by the European Central Bank (ECB) in 2024 showed that the positive correlation between the dollar and crude oil prices moving in the same direction has been strengthening in recent years. Using the ECB’s methodology to observe changes in their correlation over longer time spans reveals that this trend is also strengthening in 2026.

An analysis by the Bank for International Settlements (BIS) in 2023 indicated that this may partly reflect structural changes. One conceivable factor is the increasing presence of the US as a net energy exporter, i.e., the “monetization of the dollar by oil-producing countries.”

A possible path is that in the US, improved trading conditions reflecting favorable or unfavorable import and export conditions, coupled with an improved balance of payments, will also affect the supply and demand of the dollar. A supply shock to oil could also spur investment from oil-producing companies and others within the United States.

It is a fact that many factors have contributed to the occasional positive correlation between the two since 2022. Following Russia’s invasion of Ukraine in 2022, there was a surge in energy prices and a sharp rise in interest rates by the Federal Reserve (FRB). Subsequently, as oil prices fell, the Fed adjusted by cutting interest rates.

However, if structural changes make it easier for rising oil prices and a stronger dollar to occur simultaneously, then whenever oil prices rise, Japan will suffer a double blow, including a depreciating yen. Due to concerns about inflation and fiscal policies aimed at addressing rising prices, long-term interest rates will also rise, potentially resulting in a triple blow to Japan: higher oil prices, a weaker yen, and depreciating bonds.

To prevent the current trend of “the yen will inevitably depreciate” from taking hold, Japan should also incorporate ensuring the credibility of the yen into its core policies.