Currency strategists have had a radical rethink on the trajectory of the yen in the wake of the Bank of Japan’s (BOJ) interest rate hike in July and the Federal Reserve’s (Fed) recent signalling of looming cuts in US borrowing costs.

Prior to the BOJ’s July 31 decision, many strategists still warned of further weakness in the beleaguered yen, a currency that had already slumped about 12% against the dollar in the first half of the year. Bank of America Corp (BofA), ATFX Global Markets and Royal Bank of Canada all cautioned as recently as June that Japan’s intervention in the market may not stop the slide, leaving the yen vulnerable to another run past 160 to the greenback.

Yet over the past few weeks, the view of yen watchers has swung firmly in favour of the currency holding its recent gains, and likely adding to them over the course of this year. At the heart of those forecast changes is the prospect of a narrowing of interest rate differentials between the US and Japan.

Fed chair Jerome Powell said in Jackson Hole last month that “the time has come” to cut rates, while the BOJ suggested in a pair of research papers that more rate hikes are possible, and governor Kazuo Ueda did the same during comments in Parliament.

“The playout of those events gave us greater conviction to lower our dollar-yen forecasts,” said Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corp (OCBC), which cut its year-end view on the pair to 138 from 141. “The Fed embarking on a rate-cut cycle will mean that Fed-BOJ policy shifts from divergence to convergence.”

Among the most bullish on the yen is Macquarie Group Ltd, which revised its year-end forecast from 142 to 135, a level last seen in May of 2023. Others also project the Japanese currency breaching 140 soon. Standard Chartered Bank now sees 140 for year end, and 136 for the first quarter of 2025.

The yen’s swift turnaround from its lowest level in about 38 years in early July has already brought many carry trades crashing down across global markets. It’s also a risk for the earnings of Japanese exporters, which until recently were driving powerful gains in the nation’s stock market. 

For prognosticators of the yen’s future moves, US economic data and the Fed’s monetary policy remain key. After Powell’s speech at the Jackson Hole conference, the yen advanced amid a broad dollar selloff to 143.45, its strongest level since a dramatic spike on Aug 5. Swaps traders are betting the Fed will cut rates by at least 25 basis points in September, with a one-in-four chance of an even bigger 50 basis-point move. 

“It was 90% Jackson Hole” that led to Macquarie’s forecast change, said Gareth Berry, a strategist based in Singapore. “Powell effectively pre-committed to a rate cut, and even dangled the prospect of more aggressive easing if the labour market deteriorates.”

Investors are more divided on the timing of the next possible rate hike from the BOJ, but the consensus is that it will happen, which is supporting the yen.

Although Ueda hasn’t said that rate hikes are imminent, he emphasised in Parliament that the BOJ still plans to hike rates if the economy and prices stay in line with forecasts. Standard Chartered said the governor’s comments strengthen expectations for further monetary tightening after a leadership vote for Japan’s ruling party on Sept 27, which will determine who becomes the next prime minister.

“Markets may be underpricing the prospect of a more hawkish BOJ” in the fourth quarter, wrote Standard Chartered strategists Steven Englander and Nicholas Chia in a note.  

The Japanese currency traded at 146.45 per dollar as of 8.30am in Tokyo on Monday, after the greenback gained last Friday on US economic data that eroded support for a jumbo interest-rate reduction in September.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, said she hadn’t changed her forecasts for 145 per dollar at year end, though she sees it appreciating to 139 at the end of 2025. 

Yet some strategists are sticking to their guns on their view that the yen is poised to decline. 

“We don’t think that just because the Fed cuts rates that the yen will become strong, as this isn’t the pattern for some of the past cutting cycles,” said Shusuke Yamada, the head of Japan currency and rates strategy at BofA Securities Japan in Tokyo.

BofA expects the yen will weaken to somewhere between 150-155 at the end of this year.

Others like Shinichiro Kadota, the head of Japan foreign exchange and rates strategy at Barclays Securities Japan Ltd, are among those now pointing to more yen gains. 

In the short term, he’s got his eyes on jobs data ahead of the Fed’s September policy decision.

“If US employment data comes out weaker, then the dollar could sell further,” said Kadota, who in June had thought the yen may be at 160 around year end.

  - Bloomberg