Japanese Yen Rises Against the Dollar, Posing Risks to Financial Markets Amidst Inflation and Policy Shifts

The Japanese yen has significantly appreciated against the US dollar in early 2025, gaining 6% since the start of the year. This rise is partly attributed to uncertainties surrounding U.S. trade policies under President Trump and growing inflation within Japan. The dollar's weakness stems from unpredictable trade strategies and geopolitical tensions, potentially slowing U.S. economic growth. However, the yen's appreciation is increasingly impacting global finance, particularly for investors involved in carry trades. For years, investors profited by borrowing cheaply in Japan, leveraging low or negative interest rates to invest in higher-yielding assets abroad. This carry trade, which involved exchanging yen for currencies like the dollar, kept the yen under pressure. Since late 2020, the yen has fallen over 30% in value. However, a sudden yen appreciation can quickly erode investor profits. A temporary surge last August, driven by speculation about a policy shift by the Bank of Japan (BoJ), nearly caused a market downturn. Japan's core inflation reached 3% in February 2025, surpassing the BoJ's 2% target for the first time in three years. With a potential interest rate hike in early May, the yen's impact on financial markets is expected to intensify.