The yen’s recent rally, marking its strongest performance in over eighteen months, has captured significant attention from financial strategists. Following a volatile 24 hours of trading, experts from Amundi and TD Securities suggest the yen could potentially rise to 140 against the dollar. Macquarie Group Ltd. analysts believe this “formidable” yen rally is in its early stages and predict the yen-dollar exchange rate could approach 140 by the end of this year, possibly reaching 125 by December 2025, reminiscent of early 2022 levels.
Despite some experts cautioning about the possibility of the yen losing recent gains, recent policy actions by the Bank of Japan (BOJ) and indications from the Federal Reserve have alleviated previous pessimism surrounding the yen.
Paresh Upadhyaya, Director of Fixed Income and Currency Strategy at Amundi US, highlighted that a combination of factors—such as the beginning of the Fed’s easing cycle, heightened risk aversion, and a persistently tight stance from the BOJ—could drive the yen to 140. He downplayed the perceived difficulty of this target, suggesting it is achievable.
On Thursday, the yen advanced 0.6% to 149.01 against the dollar by mid-morning Tokyo time, extending its monthly gain to over 7% following a notable 1.8% surge on Wednesday.
This marks a significant turnaround from the first half of the year when the yen fell 12%, the worst performance among Group-of-10 currencies. During this period, Japan intervened in the foreign exchange market, expending ¥9.8 trillion ($65.4 billion) in April and May, and an additional ¥5.5 trillion last month, to stabilize the currency.
Alex Loo, Macro Strategist at TD Securities, anticipated that the dollar-yen exchange rate could hit 140 by the first quarter of next year, attributing this to tighter monetary policies in Japan and shifting investment towards local assets. Charu Chanana, Head of Currency Strategy at Saxo Markets, also projected potential yen strength towards levels below 145 this year, particularly if market volatility increases and carry trades unwind.
Shusuke Yamada, Head of Japan Currency and Rates Strategy at BofA Securities, expects the yen to trade in the 140s, driven by anticipated Fed rate cuts and potential BOJ rate hikes to 0.75% next year. Similarly, Sebastian Boyd, MLIV Strategist, argued that the yen appears undervalued and could strengthen further based on current conditions.
Macquarie’s Gareth Berry predicts additional yen strengthening as popular carry trades involving yen sales decline, noting that the Fed’s anticipated easing cycle might undermine the rationale for such trades.
The yen has appreciated against every major currency in the past month, a notable shift from its near 38-year low against the dollar on July 3. Hedge funds have played a role in this rally, reversing their yen sales in favor of higher-yielding currencies like the Mexican peso.
Despite optimistic forecasts, investors face uncertainties including the US election and future policy directions from the BOJ and the Fed. Japan’s borrowing costs, at about 0.25%, remain significantly lower than those in the US, where rates are set between 5.25% and 5.5%. Swaps traders are anticipating at least two US rate cuts this year, with the first possibly occurring in September.
However, not all market participants share the bullish sentiment towards the yen. Some suggest that without a US recession or more dovish Fed policies, sustained yen appreciation might be challenging. David Zhou of abrdn expressed skepticism, foreseeing a potential return to the 155 level once market volatility eases.
Tohru Sasaki of Fukuoka Financial Group Inc. echoed concerns about the yen’s long-term strength, suggesting it could weaken towards 160 if focus shifts back to rate differentials and economic fundamentals.
Nevertheless, many analysts view the BOJ’s recent policy moves, following its first rate hike in March, as a significant shift. Carol Kong from Commonwealth Bank of Australia noted that the BOJ’s commitment to further rate increases, contingent on economic conditions, represents a hawkish turn, with a forecast of the yen trading at 145 by the fourth quarter of next year.
