1000 Yen (Meiji Restoration) – Japan

In 2018, Japan's currency situation was characterized by a persistent environment of ultra-low interest rates and a relatively weak yen, largely shaped by the divergent monetary policies of the Bank of Japan (BOJ) and the U.S. Federal Reserve. While the Fed continued its cycle of interest rate hikes and balance sheet normalization, the BOJ maintained its aggressive quantitative and qualitative easing (QQE) program with yield curve control, keeping short-term rates negative and the 10-year government bond yield near zero. This policy divergence kept the yen under pressure for much of the year, trading in a range of approximately ¥105 to ¥114 against the U.S. dollar, which supported the profits of Japan's major exporters but also contributed to subdued domestic inflation.

Despite the weak currency, Japan continued its long struggle to escape deflationary pressures and achieve the BOJ's elusive 2% inflation target. While core inflation (excluding fresh food) briefly touched 1% in early 2018, it remained well below target for most of the year, as modest wage growth and deeply entrenched consumer price sensitivity limited pass-through effects. This "low inflation despite weak yen" paradox underscored the structural challenges in the economy, leading the BOJ to repeatedly emphasize its commitment to powerful monetary easing with no clear exit strategy in sight.

The year was not without volatility, however, as the yen demonstrated its traditional role as a safe-haven currency during periods of global market stress. In the first quarter, concerns over a potential trade war and a sharp equity market correction prompted a rapid appreciation of the yen to around ¥105. Furthermore, by year-end, growing fears of a global economic slowdown and heightened financial market turbulence caused the currency to strengthen again, briefly pushing it below ¥110. This dynamic highlighted the ongoing tension for Japanese policymakers: a weaker yen was desirable for economic stimulus, but its sudden appreciation could destabilize financial markets and hurt corporate sentiment, all while failing to decisively lift domestic inflation.