Yen Set to Strengthen as Uncertainty Looms Over Dollar’s Sustainability
Yen Weakness Should Reverse as Dollar Strength is Unlikely to Last
As the global economy continues to recover from the pandemic, currency markets have been volatile, with fluctuations in the value of major currencies such as the US dollar and the Japanese yen. While it is acknowledged that the dollar may continue to rise in the near term, it is unlikely to last for a long time. Meanwhile, the recent trend of yen weakness is expected to reverse, with the currency set to gain strength against the dollar. This blog post explores the reasons behind this prediction and provides insights into the near-term outlook for both currencies.
Fed’s Uncertain Interest Rate Hike
The US Federal Reserve’s recent policy meeting revealed that policymakers are uncertain about the need for further rate hikes. While some officials have emphasized the need to raise rates, others have expressed concerns about the economic effects of tightening credit conditions. The meeting minutes also indicate that the Fed still has a recession in its baseline projection, with real GDP contracting in the final quarter of this year and the first quarter of next year. The uncertainty around interest rate hikes will likely weigh the dollar’s strength and prevent it from sustaining gains against the yen.
B OJ’s Positive Economic Data and Normalization Policy
On the other hand, the Bank of Japan’s positive economic data has set the stage for normalizing its policies. Japan’s GDP expanded by 1.6% in the first quarter of 2021, outpacing market estimates. Core-core consumer price inflation for April also accelerated to a 42-year high of 4.1%. With this positive data, the Bank of Japan is expected to adjust its yield-curve control regime sometime between July and October. Additionally, the bank will likely raise the 10-year JGB yield target from 0.5% to 0.75%. The normalization of policies is expected to strengthen the yen against the dollar.
Deterioration of the JGB Market
The high levels of official ownership have led to a deterioration of the JGB market, providing an additional incentive for the Bank of Japan to shift away from ultra-easy monetary policy. The last BOJ survey showed further worsening of JGB market functioning, and the Japanese central bank remains keen to improve that. This problem provides another reason for the central bank to modify its current yield-curve control scheme. With the BoJ’s JGB holdings at around 52% of the market (as of end-2022), this issue is something the bank will need to address soon.
– Fed Chairman Jerome Powell has emphasized that the US central bank has “come a long way in policy tightening” and that it “can afford to look at the data and the evolving outlook” to make assessments meeting by meeting.
– Fed funds futures are now pricing an entire 25-basis-point hike by July.
– The Bank of Japan expects to achieve its target of 2% inflation before 2024, according to BOJ Governor Haruhiko Kuroda.
While the recent trend in currency markets has seen the yen weaken against the dollar, it is expected to reverse as the Bank of Japan normalizes its policies. However, the uncertainty around interest rate hikes in the US will likely prevent the dollar from sustaining gains against the yen in the long run.
The global economic recovery from the pandemic has created volatility in currency markets, with fluctuations in the dollar and yen’s values. While the dollar may continue to rise in the short term, its strength is unlikely to last against the yen. The Bank of Japan’s positive economic data and policies are expected to strengthen the yen, reversing its recent trend of weakness. Investors should know the factors driving currency market fluctuations and consider diversifying their portfolios accordingly.