Insight
In this recent report, SMDAM's Chief Economist Shiraki offers insights into the possible risk of Japanese Yen appreciation in the near future.
"US dollar /Japanese Yen rate had been dominated by the upward trend since March 2022 mainly due to the unexpectedly high global inflation and sharp increase in the US interest rate. Especially after the FED had admitted their misjudgment regarding the inflation and turned to an aggressive monetary tightening, dollar/ yen rate had been skyrocketing from 1 USD = 115 yen level to 160 yen by the middle of 2024.
Recently that environment has been changing obviously. In March 2024, the BOJ had ended negative interest rate policy and started rate hike, while the Fed had also changed their policy and began monetary easing in September. As the monetary policies of Japan and the US had started moving in the opposite direction, it is becoming more difficult to continue Yen’s depreciation on the back of “carry trade” that takes advantage of the interest rate difference between two countries.
Though "excessive movement" is usual and typical phenomenon in the ordinary market, speculative moves sometimes result in big swing towards opposite direction after that. Dollar/ yen rate went up to 162 yen level in July despite the narrowing interest rate gap between Japan and the US as the market tried to test the tightening stance of the BOJ’s monetary policy. However, these speculative movements had resulted in sudden and steep yen's appreciation by 20 yen within less than 2 months.
Recently, speculative yen selling has pushed up the dollar/ yen rate again, mainly due to unexpectedly strong US economy and the influence of “Trump trade” before and after the US presidential election. As this summer's market showed, I believe it would be unreasonable to expect such speculative yen’s depreciation to last in the mid-to-long term.
As shown in the chart, the dollar seems to be overvalued against the yen from interest rate gap point of view and which might mean the potential end of upward trend of dollar backed by the interest rate gap.
The Fed and the BOJ will hold monetary policy meeting in December and the FED seems to cut and the BOJ is likely to raise the policy rate. I am highly sceptical about the resilience of the dollar to go through these events unscathed."
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