The division over strategists’ expectations is the widest in seven years. Then, the rise in US yields in March is complicating the Bank of Japan’s policy, and a gap is opening on Wall Street about the direction of the yen. And also on the one hand: Goldman Sachs Group, Mizuho Americas, JPMorgan Chase & Co., and Bank of America, who see the Japanese currency reaching its weakest level in more than 30 years. On the other hand? Seemingly everyone.
In fact, analysts are now the most divided since 2016, according to a currency forecast analysis that compared high and low forecasts each quarter for the following six months. At the heart of the dispute between them lies the division over the future of the American economy and its repercussions on the US dollar, the most widely traded currency against the yen. Those who see the Fed keeping interest rates high expect the dollar to rise at the expense of the yen. In contrast, many companies looking forward to an appreciation of the yen see a recession in the United States and a weak dollar as inevitable.
This may seem ironic, given the amount of ink that has been spilled on the discussion about when the Bank of Japan will tighten its ultra-loose monetary policy and the country’s ability to intervene in the currency. Yen traders say it’s the dollar’s path that really matters. “Maybe it will be what happens in the United States that will change the dynamics of the yen more than what the Bank of Japan will do,” said Johan Gade, CEO of Saxo Bank of Japan. “You can see that last year the intervention was at about 150,” Gadd said.
The Japanese currency is closely linked to the policy cycle of the US central bank
But we are now back around the 150 level. “So, from a long-term perspective, those interventions have a limited life unless they are followed up by the real driver of weakness, which is the interest rate differential.” That gap is now approaching its widest range in more than 20 years thanks to the The Fed’s tightening is the most aggressive in a generation, which contrasts with the Bank of Japan’s continued negative interest rate. As a result, US Treasury yields have soared, strengthening the dollar against lower-yielding currencies such as the yen.
It’s that dynamic that has Bank of America betting on further yen weakness. The Japanese currency is so closely tied to the US central bank’s policy cycle that it can do nothing but decline, according to strategists at Bank of America. “Until we see increasing prospects for a rate cut by the Fed, the yen is likely to continue to weaken,” said Shusuke Yamada, head of the bank’s Japanese currency and interest rate strategy.
Bank of America expects the yen to trade at 155 to the dollar by the first quarter. This is also the level at which one former senior forex official pointed out when “the government starts to worry.” The price was around 149.80 during morning trading in Tokyo
In contrast, Citi FX strategists are among the most optimistic. They expect the yen to rise to 130 yen to the dollar six to 12 months from now. Their view is based on a recession in the United States that will eventually lead to lower yields, as well as some level of BOJ tightening, said Dirk Wheeler, head of global macro and emerging markets strategy at the firm.
The Other Potential Driver of Yen’s Rise
As for the other potential driver of the yen’s rise, which is the Bank of Japan’s policy tightening measures, it remains shrouded in uncertainty. There is growing evidence that the central bank may raise its inflation expectations by the end of this month, but it’s hard to say whether this will lead to an adjustment from the Bank of Japan anytime soon. Economists expect interest rates to remain at -0.1% at this level until late next year.
Efforts to influence the yen’s value have been limited so far this year after Japanese officials intervened last autumn. While some believe the yen’s currency strength immediately after touching 150 yen per dollar in early October was evidence of intervention, officials have denied it. The currency’s gains were short-lived, and the yen gradually weakened.
Masato Kanda, Japan’s chief currency official, said on Monday that, as a general principle, raising interest rates is one way countries respond to capital flows abroad, adding that action is taken when currency movements become excessive. Such a statement suggests that traders may have left betting on the yen through the lens of interest rate cycles imposed by the Federal Reserve. Expectations have fluctuated on whether the U.S. central bank will raise interest rates again this year and when it will start lowering interest rates amid slowing growth, and they have risen to a 50-50 chance in recent days.
The significant yen appreciation at the end of last year
It’s ultimately a very close call at this stage, but the broader issue is what level of interest rates and financial conditions we truly need here to calm economic activity and ensure inflation returns to target. The bond market and the Federal Reserve are still looking for this level.
There are many uncertainties about whether strategists will make the right decision. After the significant yen appreciation at the end of last year, which defied expectations, many entered 2023 expecting gains. Instead, the currency weakened against all of its peers in the G10 and has already fallen by more than 12% against the dollar since January.
I have to admit that we were in the camp that believed the yen’s performance would be better this year, given the peak of policy in the United States and the idea that Japan would inevitably have to adjust its normalization path.” Aninda Mitra, a senior strategist and investment expert in Singapore, said, “Mitra sees room for the yen to turn around early next year, although she warns that the currency could weaken to 155 if the Federal Reserve chooses to raise U.S. interest rates again.