The Japanese yen strengthened after the Bank of Japan (BoJ) changed its policy primarily because the BoJ resumed raising interest rates, ending a long period of ultra-loose monetary policy. This shift narrowed the yield gap between Japanese government bonds and those of other countries, especially the United States, making the yen more attractive to investors. Additionally, Japan’s stable current account surplus and the yen’s historically low valuation provided fundamental support for the currency’s appreciation[1].
For many years, the BoJ maintained very low or negative interest rates to stimulate the economy, which caused the yen to weaken against other major currencies like the US dollar. This was because investors could earn higher returns elsewhere, particularly in the US, where the Federal Reserve had been raising rates aggressively. The large difference in interest rates between Japan and the US encouraged investors to borrow yen cheaply and invest in higher-yielding assets abroad, a practice known as the carry trade. When the BoJ started to raise rates, even modestly, it reduced this incentive, leading to increased demand for the yen and its subsequent strengthening[1][4].
The recent policy change involved a 25 basis point increase in the BoJ’s policy rate to 0.50%, a level not seen since 2007-2008. Although the BoJ’s communication remained somewhat cautious to avoid a sharp yen appreciation, the market interpreted the move as the start of a tightening cycle, with expectations of further rate hikes later in the year. This anticipation of higher interest rates in Japan made the yen more attractive relative to the US dollar, contributing to its rise[1].
Another important factor is Japan’s current account surplus, which means the country exports more than it imports, generating a steady inflow of foreign currency that supports the yen. This surplus acts as a fundamental anchor for the currency, reinforcing its strength when combined with tighter monetary policy[1].
The yen also benefits from its status as a safe-haven currency. In times of global market stress or uncertainty, investors tend to seek out the yen because of Japan’s political stability and large foreign reserves. In 2025, episodes of market volatility and risk aversion led to increased demand for the yen, further boosting its value. However, this safe-haven status has been somewhat questioned recently due to political uncertainties in Japan and changing market dynamics, but it still plays a role in yen strength during risk-off periods[2][3].
The narrowing yield differential between Japanese and US government bonds is crucial. When the US Federal Reserve raised rates aggressively, the yield gap widened, favoring the US dollar. Now, with the BoJ raising rates and the Fed pausing or slowing hikes, this gap is closing. A smaller yield gap reduces the incentive to hold US dollars over yen, encouraging investors to buy yen and sell dollars, which strengthens the yen[1][4].
In summary, the yen’s strengthening after the BoJ policy changes can be attributed to the resumption of rate hikes by the BoJ, which ended years of ultra-loose monetary policy, narrowing the yield gap with the US, Japan’s stable current account surplus, and the yen’s role as a safe-haven currency during times of market stress. These factors combined have shifted investor sentiment in favor of the yen, leading to its appreciation against the US dollar and other currencies.