The mystery of the yen's continued depreciation despite narrowing interest rate gap between Japan and the US

The conclusion in the FX market that “as the interest-rate differential narrows → the yen appreciates” has already lost validity. Since 2025, with the U.S. cutting rates and Japan raising them, the interest-rate differential between the U.S. and Japan has narrowed to its lowest level in about three years, but the yen exchange rate has still stayed around 155 yen per US dollar, basically unchanged from the beginning of the year. What, exactly, is the key to this “puzzle” of why the yen has continued to depreciate during a period of narrowing interest-rate differentials?

The Bank of Japan will hold its monetary policy meeting on December 18–19 to discuss raising the policy rate. Market forecasts put the probability of a rate hike at as high as 95% for the December meeting.

At the Federal Open Market Committee (FOMC) meeting held in December, the U.S. Federal Reserve (FRB) decided on three consecutive rate cuts. If the Bank of Japan decides to raise rates, the policy interest-rate differential between Japan and the U.S. will fall to the smallest level in about three years. At present, the actual interest-rate differential has already narrowed to its lowest level in about two and a half years. Generally speaking, a narrowing interest-rate differential caused by rising Japanese rates and falling U.S. rates should trigger yen appreciation against the US dollar.

To continue reading, please click here to visit the Nikkei Chinese website

The Nihon Keizai Shimbun and the Financial Times merged into the same media group in November 2015. The alliance formed by the two newspaper companies—Japan and the UK—both of which were founded in the 19th century, is moving forward with collaboration across a wide range of areas, under the banner of “high-quality, the strongest economic journalism.” In this instance, as part of that effort, the two newspapers have enabled article exchanges between their Chinese websites.