Three straight years of outsized declines in the yen look set to end in 2024.
That’s the view of market participants polled by Bloomberg, who on balance see the currency rallying next year as the Bank of Japan exits the world’s last negative interest rate regime and its global peers cut borrowing costs.
While projections for a 2023 yen rebound started going wrong as early as February, forecasters see key differences this time around. A year ago traders were speculating that a new chief at the BOJ might unwind ultra-easy monetary policy. Now they’re aligned with economists who say a shift will come within months, and the central bank’s own leadership has publicly discussed the implications of a future exit.
“The situation won’t disappoint the yen bulls on this occasion,” said Shoki Omori, a strategist at Mizuho Securities Co. in Tokyo, who sees the prolonged slump in the currency coming to an end. “There’s not a lot of room for the BOJ to tighten policy, but they do seem determined to rip up negative interest rates.”
The picture outside Japan also looks clearer than it did 12 months ago. Whereas traders last year were talking about US interest rates likely peaking in 2023, projections this month from Federal Reserve policymakers point to 75 basis points of cuts in 2024.
The median of forecasts compiled by Bloomberg indicates the yen will strengthen to 135 versus the dollar by the end of 2024 as the wide interest gap between the US and Japan narrows. Their overly bullish projection about a year ago was for the pair to trade around 131 at end-2023.
See also: Yen declines 1% as BOJ’s Ueda pushes back on rate-hike bets
The yen was down 0.2% at 142.43 at 9.16 am in Tokyo on Monday.
“The Federal Reserve ultimately rose by 100 basis points in 2023, while the Bank of Japan maintained its negative key rate, which was a major headwind for the yen,” said Spencer Hakimian, chief executive officer of Tolou Capital Management in New York. He sees the “reverse scenario” playing out in 2024 and expects the yen to reach about 135 by the end of the year.
See also: Pimco is buying yen to prepare for tighter BOJ monetary policy
The 10-year US Treasury yield, which has been a major driver of the dollar-yen’s direction this year, has dropped about 50 basis points over the past month, setting the scene for a change in the currency market.
“It does seem that bond yields have now peaked, the Fed has finished hiking and the dollar has further to fall in 2024,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale in London. “The yen should make substantial gains.”
Yet there’s still room for a lot of volatility. The yen rallied almost 4% in just one day earlier this month amid a short-lived spike in bets that the BOJ would hike rates at conclusion of its Dec. 18-19 meeting. It reversed course over the following two days before strengthening again.
Policy gatherings in Tokyo in January and March provide more triggers for speculation in the buildup to an April decision that is seen by a majority of BOJ watchers as the most likely time for change. While inflation has remained above the central bank’s 2% target for more than a year and half, officials appear keen for more evidence of solid wage growth, which may come during pay negotiations early next year.
“We believe that there is sufficient longer-term structural improvement in the economy,” said Steven Barrow, the London-based head of G-10 strategy at Standard Bank, which has a one-year forecast of 125 for the yen.
Barrow sees the currency appreciating over the longer term regardless of whether rate differentials narrow. He cited positive change in Japan including the end of deflation and the stock market rally. The benchmark Topix equity gauge has soared about 23% so far this year.
Asset managers have trimmed their bearish bets against the yen in recent months as sentiment began to gradually shift, according to data from the Commodity Futures Trading Commission through Dec. 12. Hedge funds remain sceptical.
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Daisuke Karakama, chief market economist at Mizuho Bank Ltd., noted that Japan’s trade deficit means there will continue to be people in the market looking to sell the yen, even if the broad trend is for gains. He’s among those predicting a rally and estimated the currency to reach around 132 at end-2024.
Below is more commentary from investors and strategists on the yen for the year ahead.
Yujiro Goto, head of Japan FX strategy at Nomura Securities Co.: “The Fed and the ECB may start delivering rate cuts around June, supporting the appreciation path for the yen. The US economy falling into recession would boost the chance of dollar-yen moving toward the 130-135 area, while a soft-landing scenario may limit the pair’s decline to around 140.”
Takeshi Yokouchi, senior portfolio manager at Sumitomo Mitsui DS Asset Management Co.: “Dollar-yen is sure to face downward pressure if the major central banks start cutting rates and the BOJ shifts policy away from the negative interest rate. However, the decline is likely to be somewhat limited, unlike the yen’s rise to 100 per dollar seen in the past because the economic recovery in Japan does not seem to have the same strength.”
Hiroyuki Machida, director of Japan FX and commodities sales at Australia & New Zealand Banking Group: “The dollar will probably weaken due to lower US yields. Even if the BOJ won’t tighten policy amid uncertainties caused by rate cuts in the US, the yen can rise solely because of the direction of US monetary policy.”
Kensuke Niihara, State Street Global Advisors Deputy President, Chief Investment Officer, Japan: “The dollar was supported by high yields, strong equities performance and a resilient economy, so there was no reason to sell the dollar this year. But if any of those factors change, which would drag the dollar lower, the yen may feel the impact the most from a weakening dollar. Such appreciation pressure on the yen will strengthen in 2024.”
Kenta Tadaide, chief FX strategist at Daiwa Securities Co.: “The Fed will probably start cutting borrowing costs around the summer of 2024 when the economy goes into recession, pushing dollar-yen below 130. The risk to this scenario is that the US achieves a soft landing, keeping favourable sentiment in the US, which maintains yen-selling pressure and keeps the dollar-yen above 140.”
Teppei Ino, Tokyo head of global markets research at MUFG Bank Ltd.: “With a US presidential election coming up next year, public sentiment will likely increase about supporting economic growth, and in that case the Fed is likely to deliver cuts. The BOJ is expected to start normalizing policy in January.”
