Hello, this is <Frank>.

Today, let’s take a closer look at the relationship between yen depreciation and rising interest rates. In fact, these two economic forces are tightly interlinked and often influence each other.

Remember this: “Yen depreciation” means the value of the yen is falling.

1. How Are Yen Depreciation and Interest Rates Connected?

1) Interest Rate Differentials Drive Yen Weaker

This is the core mechanism. When interest rates in Japan remain low while U.S. rates are high, what happens? Investors naturally want to chase higher returns and buy U.S. assets. To do so, they sell yen and buy dollars — a move known as “yen selling, dollar buying.”

The result? The yen weakens. In short, interest rate gaps between countries are a major driver of yen depreciation.

2) Weaker Yen Can Trigger Rate Hikes in Japan

When the yen weakens, the cost of imports — especially energy and food — increases. This can lead to inflation, or rising prices.

In response, the Bank of Japan may hike policy rates to curb inflation. This leads to a chain reaction: yen depreciation → higher import prices → inflation → rising interest rates.

3) When No Rate Hike Leads to Further Yen Weakening

If the Bank of Japan doesn’t raise rates while the yen keeps dropping, it could spark market instability. To restore investor confidence, Japan may feel compelled to hike rates — not for inflation, but for credibility. This is a rate hike aimed at defending the currency.

2. In Summary:

• Low interest in Japan + High U.S. interest = Yen depreciation (Dollar buying)
• Yen depreciation → Higher import prices → Inflation risk
• Inflation → Rate hikes as tightening policy

Simple, right? And yet powerful.

Now keep in mind: when interest rates go up, the yen may strengthen, but stock prices can fall. Why?

Higher interest rates mean higher borrowing costs for companies and lower profits. The present value of future earnings also drops, especially for growth stocks. On top of that, higher bond yields make bonds more attractive, pulling money away from stocks.

As for me — if the U.S. dollar ever drops below ¥110 again, I’m considering jumping back into FX trading. But not yet. Timing is everything. “Sometimes not trading is also a form of trading.”

So — will we see USD/JPY break 110 again? I’m watching closely.

For more, check out this post: “No Stop Loss, Still Gained 1,253.7 Pips!?”

⚠ Please Note ⚠
Forex trading should only be done with funds you can afford to lose. Using too much leverage can lead to serious losses. Be cautious, always.

The method introduced here — making profits without a stop-loss — is not something I recommend. There are times when a stop-loss is necessary. Trade at your own risk.

If you’re interested in my published books, please check them out here.

Thank you for reading today.

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