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The Japanese yen: why it behaves the way it does

· FxRate Desk · 6 min read

The yen has a reputation for doing the opposite of what people expect. In a market scare, it often rises. When Japan’s economy is doing fine, it can sink for years. Both habits come from one structural fact and one policy fact, and neither is mysterious once you see them side by side.

First, how big the yen is. The Bank for International Settlements found the yen on one side of 16.8% of foreign exchange trades in April 2025, the third most traded currency behind the dollar and euro. As a reserve asset it is smaller: the IMF’s data for the second quarter of 2026 puts the yen at 4.96% of allocated official reserves, down from 5.43% in the first quarter.

Why the yen is called a safe haven

Japan has spent decades lending to the rest of the world. According to Japan’s Ministry of Finance, the country’s net international investment position at the end of 2025 was about ¥561.75 trillion, up from ¥538.10 trillion a year earlier. Gross external assets were about ¥1,805.63 trillion.

In plain terms, Japanese households, companies and insurers own a great deal of foreign stock, bonds and property. When markets panic, some of that money tends to come home, and bringing it home means selling foreign currency and buying yen. That is the mechanism behind the yen’s safe-haven reputation. It is a tendency, not a law, and it has failed in some episodes. Be wary of anyone who treats it as guaranteed.

Cheap borrowing is a second ingredient. For years Japanese interest rates sat far below those abroad. Which brings us to the carry trade.

A short timeline that does most of the explaining

  1. 1973. Japan let the yen float against the dollar, after the Bretton Woods system of fixed rates broke down.
  2. 22 September 1985. The Plaza Accord: finance ministers and central bank governors of the G5 met at the Plaza Hotel in New York and agreed the dollar was overvalued. A National Bureau of Economic Research paper notes the dollar fell about 40% against major currencies over 1985 to 1987, with the yen rising more than the European currencies.
  3. August 1998. During the Asian financial crisis, the yen weakened to nearly 148 per dollar, even after US authorities joined Japan in buying yen.
  4. March 2011. After the earthquake and tsunami of 11 March, the yen hit a record high, and the G7 jointly intervened to stem its rise. The surprising part: a disaster at home made the currency stronger, not weaker.
  5. 19 March 2024. The Bank of Japan ended its negative interest rate policy, a small charge on some bank reserves held at the central bank since 2016. It was the first rate rise in 17 years.

Read the list for what repeats. The yen tends to strengthen when something frightens the world, and to weaken when yields elsewhere are much higher than Japan’s and investors take advantage.

The carry trade, with real arithmetic

A carry trade borrows in a currency with low interest rates, swaps the money into a currency that pays more, and pockets the gap. It works nicely as long as the exchange rate stands still. Here is an illustrative example. Every number is made up.

An investor borrows ¥10,000,000 at 1% for a year, and converts it at 150 yen per dollar, which gives $66,666.67. They put that into a dollar deposit paying 5%, ending with $70,000. They owe ¥10,100,000.

  • If the rate is still 150 at the end, $70,000 converts back to ¥10,500,000. After repaying ¥10,100,000, they keep ¥400,000.
  • If the dollar has fallen to 135 yen, $70,000 converts to only ¥9,450,000. After repaying, they are ¥650,000 short.

Moving from 150 to 135 is a 10% fall for the dollar, or an 11.1% rise for the yen (150 / 135 minus 1). A 10% shift turned a 4-point interest gain into a loss of more than six points. That asymmetry is the whole danger of the trade: small, steady income against a rare but costly jump. It is why carry traders rush to close positions together when the yen jumps, and the rush itself pushes the yen up further.

Evidence for how this plays out comes from the BIS, which studied the market turbulence of early August 2024. It described borrowed-money trades unwinding in equity and currency markets, which amplified an initial reaction to weak US data. It put a rough mid-range estimate of the size of FX carry trades going into the event at ¥40 trillion, about $250 billion, and said this was probably an underestimate because of data gaps. Nobody can measure these positions precisely. That is part of the difficulty.

When the yen is weak: the 2024 to 2026 episodes

Flip the carry trade around and you get a weak yen whenever rate gaps are wide. Exiting negative rates in March 2024 did not end the slide. By the time of the 2026 episode below, the dollar was again buying about 160 yen.

Japan responded with direct currency purchases. Between late April and late May 2024, authorities spent ¥9,788.5 billion buying yen. In 2026 they did it again: about ¥11.73 trillion between 28 April and 27 May, a monthly record, reported by the Finance Ministry on 29 May. On the night of 30 April the dollar dropped from about 160 yen to about 155 after the finance minister signalled “decisive action”.

Interventions can slow a move or break its momentum. They cannot permanently overrule the gap in interest rates, which is why they tend to come in bursts around threshold levels.

Policy has kept moving. On 18 September 2026 the Bank of Japan raised its policy rate from 1% to 1.25%, the highest in 31 years, by a 7 to 2 vote. The yen fell on the day, as investors focused on the split vote. The policy rate may have moved again by the time you read this, and the Bank of Japan’s own site is the place to check.

What this means when you convert yen

Three practical points follow from the history, and none of them requires a view on where the yen is going.

Big moves cluster. Quiet years are followed by sudden days. Intervention days and policy meetings are when a quote can jump several yen within hours. If you are paying a large invoice in yen, look at the calendar of Bank of Japan meetings before assuming today’s rate will hold.

Direction depends on the other side too. A yen pair is half about Japan and half about the other country. USD to JPY reacts to US rates; EUR to JPY reacts to euro-area rates. Pick the pair that matches what you will actually do.

Headline rates are not what you receive. A converter shows a mid-market reference, and rates refreshed hourly can differ from a provider’s quote. The gap is the provider’s margin. Our Japanese yen page lists the pairs side by side.

None of this predicts where the yen goes next. Economists disagree about how far the Bank of Japan will raise rates, whether intervention changes anything lasting, and how much of the yen’s behaviour is policy and how much is simple investor mood. For anyone sending or spending money, the sensible response is modest: avoid making a one-off conversion at the worst possible moment, and split a very large one if timing is flexible.

Sources

Checked: November 2026

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