Yen’s Recent Rise and Potential for Further Gains in 2025
The Japanese yen has experienced a recent surge, primarily fueled by a decline in US Treasury yields. This positive momentum has sparked discussions among analysts about the currency’s future trajectory. Capital Economics, a leading research consultancy, predicts further strengthening of the yen in 2025, although they caution against expecting a dramatic rally akin to the one observed in mid-2024. This analysis delves into the factors driving the yen’s current performance and explores the potential for further appreciation in the coming year.
The recent dip in US Treasury yields has provided significant support to the Japanese yen. This inverse relationship between the two is not surprising, as the prior surge in Treasury yields, which had significantly outpaced Japanese government bond yields, exerted substantial downward pressure on the yen. The easing of US Treasury yields has alleviated this pressure, contributing to the yen’s recent rebound.
Adding to the yen’s positive momentum are hawkish comments from Bank of Japan (BOJ) officials, including Governor Kazuo Ueda and Deputy Governor Masayoshi Himino. These statements, combined with media reports hinting at a potential interest rate hike by the BOJ in the near future, have further bolstered market sentiment toward the Japanese currency. While the yen remains relatively weak against the US dollar, the shift in US Treasury yields and the BOJ’s potential policy tightening raise the possibility of a renewed yen rally.
Despite the yen’s recent gains and the potential for further appreciation, Capital Economics remains cautious about the extent of any future rally. They believe that a significant surge, comparable to the one witnessed in mid-2024, is unlikely. Two key factors that propelled the previous rally are absent in the current environment. Firstly, while Capital Economics anticipates a decline in US Treasury yields, they do not foresee a substantial drop. Their projection of a further 50 basis point cut by the Federal Reserve, with 40 basis points already priced in by the market, is unlikely to provide a significant boost to the yen.
Secondly, while the yen’s valuation is not as stretched as it was previously, it remains relatively low. The real effective exchange rate, a measure of the yen’s value against a basket of currencies, indicates continued weakness compared to historical levels. This suggests that the yen’s current valuation may not offer substantial room for significant appreciation.
However, Capital Economics acknowledges the possibility of further gains for the yen, albeit at a more moderate pace. They highlight the potential for a hawkish surprise from the BOJ, which could trigger further appreciation. While the exact nature and timing of any potential policy shift remain uncertain, the possibility of such a move adds an element of unpredictability to the yen’s outlook.
Taking into account these factors, Capital Economics projects a year-end target of ¥145 per US dollar for the Japanese yen. While this represents a notable appreciation from the current levels, it falls short of the dramatic gains witnessed in the past. The yen’s future trajectory will depend on a complex interplay of factors, including the direction of US Treasury yields, the BOJ’s monetary policy decisions, and broader global economic conditions. While a significant rally may not be on the horizon, the yen appears poised for further gains in the coming year, albeit at a more measured pace. The currency’s performance will be closely watched by investors and analysts alike, as it navigates a complex and ever-changing global economic landscape.
