Analysis of the Japanese Yen's Performance Against the US Dollar

Date: Thursday

Capital Economics has released an analysis regarding the performance of the Japanese yen in relation to the US dollar, anticipating a stronger outlook for the yen in 2025.

Current Context
The commentary follows a challenging period for the yen, primarily due to the differing monetary policies of the US Federal Reserve (Fed) and the Bank of Japan (BoJ). In 2024, despite rate cuts from the Fed and rate hikes from the BoJ, the yen has depreciated by around 10% against the dollar.

Monetary Policy Divergence
The Fed's recent hawkish stance, which hints at minimal rate easing (only 50 basis points) in 2025, contrasts with the BoJ's decision to pause its tightening measures, exacerbating the yen's decline. Fed Governor Powell’s cautious comments alongside the BoJ’s hesitance to further tighten the policy have resulted in rising US Treasury yields and a corresponding decrease in the yen's valuation.

Yield Challenges
Capital Economics mentions that long-end Treasury yields have consistently challenged the yen throughout the Fed's easing phases. Even with positive short-term prospects, as observed on Monday, the ongoing trend continues to apply pressure.

Notably, the 10-year US Treasury yield is expected to end the easing cycle higher than its starting point, an occurrence that is rare but not without precedent. Meanwhile, the 10-year Japanese Government Bond (JGB) yield has struggled to keep pace with the Treasury yield, despite the Bank of Japan's efforts through rate hikes.

Market Influences
Additional factors impacting Treasury markets include speculations regarding Trump's potential election and forthcoming tariffs and fiscal stimulus next year.

Looking Forward to 2025
For 2025, Capital Economics forecasts a more beneficial monetary policy landscape for the yen. While the Fed is likely to approach further rate cuts cautiously, there should be sufficient easing to sustain long-dated yields at their current levels. Conversely, under Governor Ueda's data-dependent strategy, the BoJ may initiate policy normalization more robustly than investors currently anticipate, which could lead to enhanced long-end yields and bolster the yen's strength. Capital Economics predicts that the yen will reach 145/$ by the end of 2025.

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