500 Yen – Japan

In 2005, Japan’s currency situation was dominated by the aftermath of a prolonged period of deflation and the Bank of Japan's (BOJ) unprecedented quantitative easing (QE) policy. The yen was in a phase of relative weakness, trading around 110 to 120 against the US dollar, a level that supported the nation's vital export sector, including giants like Toyota and Sony. This environment was the result of the BOJ's aggressive monetary stimulus, initiated in 2001, which flooded the financial system with liquidity in a historic attempt to combat falling prices and stimulate the economy after the collapse of the asset bubble in the early 1990s.

Domestically, the economy was showing tentative signs of recovery, marking the beginning of what would later be called the "Izayoi" boom. However, deflationary pressures, though easing, persisted, keeping interest rates at effectively zero. This "zero-interest-rate policy" (ZIRP), combined with the large interest rate differential with the United States (where the Federal Reserve was raising rates), encouraged the "carry trade." Investors borrowed cheap yen to invest in higher-yielding assets abroad, a dynamic that further suppressed the yen's value and contributed to global financial liquidity.

By the end of 2005, the BOJ was signaling a pivotal shift, preparing to end its five-year QE policy, which it ultimately did in March 2006. This move was prompted by growing confidence that deflation was receding and that the financial system was stabilized, setting the stage for a future normalization of monetary policy. Thus, 2005 represented a transitional year—the tail end of an era of extreme monetary accommodation, with the yen’s weakness providing a tailwind for economic growth, while policymakers cautiously laid the groundwork for a less stimulative future.