Decade of Exploration: In-Depth Analysis of JPY to HKD and USD Exchange Rates and Investment Insights

The Decade of Yen Depreciation: From Highs to Lows

Over the past ten years, the Japanese yen has experienced a prolonged depreciation cycle. Starting from late 2012 when the exchange rate was around 80 yen per US dollar, the yen steadily declined to approximately 152 yen per dollar in November 2023, hitting a 32-year low. This downward trend was not sudden but driven by a series of structural factors and long-term trends.

At the end of 2012, the Abe government in Japan launched aggressive quantitative easing policies, while the US began to exit its easing cycle and gradually raise interest rates. The divergence in monetary policies between the two countries became the core driver of yen depreciation. The Federal Reserve’s continued rate hikes boosted the US dollar, while the Bank of Japan maintained ultra-loose policies, leading to a widening interest rate differential.

It is worth noting that yen depreciation was not solely due to monetary policy differences. Japan, as a major importer of energy and food, has import dependency rates of 88% and 63%, respectively. Rising global commodity prices directly increased import costs, widening Japan’s trade deficit. Coupled with demographic issues such as population decline and aging, which dampen domestic consumption, these structural problems further pressured the yen.

Review of Three Major Yen Depreciation Events

First Round: 2013-2015 Ultra-Loose Monetary Policy Impact

Following the launch of Abe’s economic stimulus plan, the Bank of Japan bought large amounts of government bonds, injecting liquidity into the market. Meanwhile, the Federal Reserve ended its quantitative easing and began a rate hike cycle, intensifying pessimism about Japan’s economic outlook. During this period, the yen depreciated by 18% in 2013 and 12% in 2014, with the exchange rate falling from 76 to 86 yen per dollar. The depreciation trend continued until June 2015, reaching a low of 126 yen per dollar.

Second Round: Late 2016 Rate Hike Shockwave

At the end of 2016, the Fed raised interest rates again, leading to an accelerated inflow of foreign capital into the US markets, which adversely affected Japan’s economy. The USD/JPY exchange rate, which was around 100 yen in September, quickly depreciated to about 120 yen. Although the yen weakened, this actually supported Japanese exports and industrial output in the short term, providing some economic support.

Third Round: 2022 Historical Low

October 20, 2022, marked a critical point in yen depreciation. The exchange rate briefly fell below 150 yen per dollar, with a low of 151.942, the weakest since August 1990, representing a 31.2% depreciation within the year. The fundamental cause was the Federal Reserve’s rapid and aggressive rate hikes. Amid rising global inflation, major central banks like the Fed and the European Central Bank entered rate hike cycles, while the Bank of Japan persisted with its ultra-loose policy due to domestic economic pressures, pushing the US-Japan interest rate differential to historic highs.

2023: Policy Battles and Exchange Rate Volatility

The main theme throughout 2023 was the continued divergence in monetary policy paths between the US and Japan. The Fed continued to raise rates sharply, while the Bank of Japan hesitated to adjust its negative interest rate policy. After the new BOJ governor Ueda Kazuo took office, markets anticipated a policy shift, but the central bank ultimately maintained its easing stance.

Throughout the year, the yen underperformed among the currencies of the G10, ranking last for three consecutive years. In January, the yen reached a high of 127.2 yen per dollar, sparking speculation that the BOJ might adjust its policy, but the bank remained on hold. The Fed continued rate hikes, and the yen weakened accordingly.

By mid-November, the USD/JPY exchange rate approached 152 yen, while the euro fell to 162.38 yen (a 15-year low), and the pound dropped to 186.25 yen (a three-month low). The Japanese government intervened directly, marking the first official intervention since 1998.

Japan’s Economic Status in 2023

Japan’s economy in 2023 showed mixed results. The first quarter posted a solid 2.7% growth, and the second quarter even reached 4.8%, leading markets to speculate whether Japan had emerged from the “Lost Thirty Years.” However, the third quarter suddenly plummeted to -2.1%, prompting the Cabinet Office to revise down the full-year forecast and warn of further contraction in Q4.

Another concern for Japan is the wage-price gap. Over the past three decades, Japan’s consumption and investment growth have been sluggish, but since 2022, rising energy import prices have pushed up inflation. November data showed core CPI increased by 2.5% year-over-year, marking 27 consecutive months of increases and surpassing the Bank of Japan’s 2% target. However, real wages have lagged behind inflation, declining for 19 consecutive months in year-over-year terms, and household consumption has continued to decline.

In response, the Japanese government launched a large-scale economic stimulus plan in November, including tax cuts, subsidies, and extended energy price subsidies, totaling over 17 trillion yen (about $113 billion), the largest since 2014. The plan received recognition from the IMF, World Bank, and OECD.

The Positive Effects of a Decade of Yen Depreciation

It is important not to overlook the positive aspects of yen depreciation. The yen has depreciated by 40% against the dollar, making land and labor relatively cheaper in Japan, significantly boosting Japan’s export competitiveness. In 2022, Japan’s GDP reached 546 trillion yen, up about 10% from 495 trillion in 2012, largely benefiting from the yen’s depreciation and its effect on exports.

Outlook for 2024: Potential Reversal in Exchange Rates

As the year draws to a close, the Fed’s December policy meeting resulted in no rate hikes and even hinted at possible rate cuts in the future, which significantly weakened the dollar. Meanwhile, the Bank of Japan intervened in the currency market, causing the yen to strengthen and appreciate to around 140.

Looking ahead to 2024, there is a potential for a reversal in the USD/JPY trend. If the Fed officially ends its tightening cycle and begins cutting rates, and the BOJ ends its negative interest rate policy and starts raising rates, the interest rate differential between the US and Japan will narrow. This could lead to a strengthening yen and a weakening dollar.

The yen’s historically low levels now present an opportunity for investors to profit from exchange rate movements. Investors can consider trading in high-liquidity currency pairs such as USD/JPY, EUR/JPY, GBP/JPY, and AUD/JPY based on their outlook.

Conclusion

Japan’s economic weakness, prolonged ultra-loose monetary policy, and the aggressive rate hikes by the Federal Reserve have jointly driven the yen’s significant depreciation over the past two years. The future trend of the yen depends on the relative paths of monetary policy in Japan and the US, and any policy shifts will profoundly impact the exchange rates of the yen against the Hong Kong dollar, US dollar, and other currencies.

Currently at a historic low, the yen indeed offers an opportunity for forex trading. However, it is important to remember that exchange rate fluctuations involve complex economic and policy factors, and forex trading carries risks. Investors should develop comprehensive trading strategies and establish robust risk management mechanisms.