Japanese Yen Investment Guide: Is Now the Right Time?
A comprehensive guide to investing in the Japanese yen in 2025. Explore BOJ policy, historical trends, buying strategies, and whether the yen is undervalued.
Japanese Yen Investment Guide: Is Now the Right Time?
The Japanese yen has been one of the most talked-about currencies in recent years. After falling to multi-decade lows against the US dollar in 2022–2024, many investors are asking whether the yen represents a once-in-a-generation buying opportunity. This guide examines the factors driving the yen, its historical patterns, and practical strategies for yen investment in 2025.
The Yen's Historic Decline
The yen's weakness since 2021 has been dramatic by any measure:
| Date | USD/JPY Rate | Change from Jan 2021 |
|---|---|---|
| January 2021 | 103 | — |
| January 2022 | 115 | -10.4% (yen weaker) |
| October 2022 | 150 | -31.3% |
| January 2024 | 141 | -27.0% |
| July 2024 | 161 | -36.0% |
| January 2025 | 157 | -34.4% |
A USD/JPY move from 103 to 157 means the yen lost roughly 34% of its value against the dollar in four years. In purchasing power parity terms, the yen is estimated to be 35–45% undervalued against the dollar, making it one of the most undervalued major currencies in the world.
Why Has the Yen Fallen?
1. Interest Rate Divergence
The primary driver has been the massive gap between US and Japanese interest rates. While the Federal Reserve raised rates aggressively from near-zero to 5.25–5.50% in 2022–2023, the Bank of Japan (BOJ) kept its policy rate at -0.1% until March 2024. This differential made the yen an unattractive currency to hold and a popular funding currency for carry trades.
2. BOJ's Yield Curve Control (YCC)
From 2016 to 2024, the BOJ maintained a yield curve control policy that capped 10-year Japanese government bond (JGB) yields at artificially low levels. This policy suppressed Japanese yields even as global yields surged, widening the rate gap further.
3. Japan's Trade Deficit
Japan's trade balance shifted from surplus to deficit after 2011, driven by energy imports following the Fukushima nuclear disaster and rising commodity prices. A trade deficit means more yen being sold to buy foreign currencies for imports, weakening the yen.
4. Carry Trade Flows
The yen has been the world's favorite carry trade funding currency. Investors borrow in yen at near-zero rates, convert to higher-yielding currencies, and invest abroad. This creates persistent selling pressure on the yen.
The Case for Yen Strength (Bull Case)
BOJ Policy Normalization
The BOJ ended negative interest rates in March 2024 and raised rates to 0.25% in July 2024. Further rate hikes are expected in 2025, with markets pricing in a policy rate of 0.50–0.75% by year-end. Every basis point of tightening narrows the US-Japan rate differential and supports the yen.
Fed Rate Cuts
The Federal Reserve began cutting rates in September 2024 and is expected to continue in 2025. As the rate gap narrows from both sides (BOJ hiking, Fed cutting), the yen should benefit.
Extreme Undervaluation
On a purchasing power parity basis, fair value for USD/JPY is estimated at 90–100 by the OECD. While PPP is not a short-term trading signal, extreme deviations tend to correct over 5–10 year periods. The current level represents one of the largest PPP deviations in the yen's post-war history.
Carry Trade Unwind Risk
The massive yen carry trade is vulnerable to sudden unwinding. If global risk sentiment deteriorates or the BOJ surprises with faster tightening, carry trade liquidation could trigger a sharp yen rally. We saw a preview of this in August 2024, when USD/JPY plunged from 161 to 141 in just three weeks.
Japan's Structural Reforms
Japan's corporate governance reforms are attracting record foreign investment into Japanese equities. Increased capital inflows support the yen. The Tokyo Stock Exchange's push for companies to improve capital efficiency and return on equity has been transformative.
The Case for Continued Yen Weakness (Bear Case)
BOJ Gradualism
The BOJ is known for extremely cautious policy changes. Even if it continues raising rates, the pace may be too slow to meaningfully close the gap with US rates. A policy rate of 0.75% in Japan vs. 4.00% in the US is still a 325 basis point disadvantage.
Japan's Structural Deficits
Japan runs persistent current account surpluses, but the composition has shifted. The income account surplus (from Japan's huge overseas investments) does not always flow back to Japan. Much of it is reinvested abroad, providing less support for the yen than headline numbers suggest.
Demographic Headwinds
Japan's population is shrinking and aging rapidly. The working-age population is declining by roughly 500,000 per year. This structural headwind limits economic growth potential and may keep the BOJ cautious about raising rates too far.
US Economic Resilience
If the US economy remains strong and the Fed cuts less than expected, the rate differential will stay wide, and the yen will struggle to recover meaningfully.
How to Invest in the Yen
Method 1: Yen Savings Account
Open a yen-denominated savings account at your bank. This is the simplest approach but comes with high conversion spreads (typically 1.5–3%) and very low interest rates (0.01–0.1% in Japan).
Pros: Simple, deposit-insured Cons: High spreads, near-zero yield
Method 2: Yen ETFs
Currency ETFs provide direct exposure to the yen without needing a Japanese bank account.
| ETF | Ticker | Expense Ratio | Description |
|---|---|---|---|
| Invesco CurrencyShares Japanese Yen Trust | FXY | 0.40% | Tracks USD/JPY |
| ProShares Ultra Yen | YCL | 0.95% | 2x leveraged yen bull |
Pros: Low cost, liquid, easy to trade Cons: No interest income, tracking error
Method 3: Japanese Government Bonds (JGBs)
Buy JGBs to earn Japanese interest rates while benefiting from potential yen appreciation. Available through some international brokers.
Pros: Earn yield plus potential FX gain Cons: Very low yields, interest rate risk, complexity
Method 4: Japanese Equity ETFs (Unhedged)
Invest in Japanese stocks through unhedged ETFs. You gain exposure to both Japanese corporate earnings and the yen.
| ETF | Ticker | Expense Ratio | Hedge Status |
|---|---|---|---|
| iShares MSCI Japan ETF | EWJ | 0.50% | Unhedged |
| Vanguard FTSE Japan ETF | — | 0.15% | Unhedged (within VXUS) |
| WisdomTree Japan Hedged Equity Fund | DXJ | 0.48% | Hedged (USD exposure) |
Note: If you want yen exposure, choose the unhedged version (EWJ). If you want pure equity exposure without currency risk, choose the hedged version (DXJ).
Method 5: Forex Market
Trade the yen directly through a forex broker. This offers the most control but requires understanding of leverage, margin, and risk management.
Pros: Lowest spreads (0.01–0.03%), precise control, leverage available Cons: High risk with leverage, requires active management
Timing Strategies
Dollar-Cost Averaging into Yen
Rather than making one large conversion, spread your purchases over 6–12 months. Convert a fixed dollar amount to yen each month regardless of the rate.
Example: $12,000 investment over 12 months
| Month | USD/JPY | Yen Received |
|---|---|---|
| 1 | 155 | ¥155,000 |
| 2 | 150 | ¥150,000 |
| 3 | 158 | ¥158,000 |
| ... | ... | ... |
| 12 | 145 | ¥145,000 |
| Average | ~151 | ¥1,812,000 |
This approach removes the stress of trying to pick the perfect entry point and ensures you accumulate yen across a range of rates.
Trigger-Based Buying
Set target levels and buy in tranches:
- Buy 25% of position at USD/JPY 155+
- Buy 25% at USD/JPY 150+
- Buy 25% at USD/JPY 145+
- Keep 25% for opportunities below 140
Event-Driven Timing
Watch for specific catalysts that could move the yen:
- BOJ meetings: 8 per year; rate decisions directly impact the yen
- US employment reports: Strong data strengthens USD, weak data weakens it
- Fed meetings: Rate decisions and forward guidance affect the differential
- Japanese intervention: The Ministry of Finance has intervened when USD/JPY exceeded 150–160
Risk Management
Position Sizing
Never invest more in a single currency than you can afford to lose 20–30% on. If you invest $10,000 in yen, be prepared for the possibility that your position could temporarily drop to $7,000–$8,000 before recovering.
Diversification
Do not put all your foreign currency allocation into the yen. A balanced approach might allocate:
- 30–40% to yen
- 20–30% to euro
- 10–20% to British pound
- 10–20% to other currencies
Time Horizon
Yen investment based on valuation requires patience. PPP-based strategies can take 3–10 years to fully play out. If you need the money within 1–2 years, the timing risk is high.
Conclusion: Is Now the Right Time?
The yen at 150+ against the dollar represents a historically significant level of undervaluation. For long-term investors (5+ year horizon), the risk-reward profile is compelling. However, the yen could weaken further before it strengthens, and the timing is inherently uncertain.
A measured approach using dollar-cost averaging, combined with patience and proper position sizing, is likely the most prudent strategy. The yen has always been a mean-reverting currency, and the current deviation from fair value is among the largest in its modern history.
Monitor live USD/JPY rates and track yen movements over time at hwanyul.com to make informed timing decisions for your yen investments.
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