Japanese Yen Q1 Fundamental Forecast: Yen Likely to Gain, But Thanks to Fed, Not BoJ – DailyFX

This article is solely dedicated to delving into that fundamental outlook. circle. To fully understand the technical outlook and price movement signals for the Japanese currency, download the full forecast for the first quarter.

Market overview: Yen depreciation reverses due to expectations for Bank of Japan interest rate hike

The yen gained support at the end of the year, likely on expectations that the U.S. Federal Reserve would lower interest rates while the Bank of Japan would raise them. The currency's fate in 2024 will depend on how these two prospects develop. It's clearly possible that both will be canceled, but the former seems riskier.

The Japanese yen has long suffered from the Bank of Japan's position as a policy outlier. Central banks have been trying for decades to stimulate domestic demand and push inflation a little further through monetary settings that are among the most accommodative in developed countries. And it met with mixed success. However, the recent wave of global inflation has not left Japan completely unscathed. The yen thus benefited from market expectations that even the Bank of Japan would be tempted to join the global trend of rising interest rates. Back in July, it even tweaked its yield curve control regime to allow 10-year municipal yields to rise more significantly, but still effectively capped them at 1%. Since then, foreign exchange markets have been concerned that real interest rate increases will continue, and even though the US Federal Reserve appears to have reached the top of its own rate-hiking cycle, this process has pushed the yen tend to be supportive. . However, the Bank of Japan has kept its benchmark interest rate at -0.1% until 2023, and there appears to be little sign of changing that policy in the first quarter of the new year.

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Key drivers: Listen to the Fed and focus on Japanese inflation

It is likely that the “USD” side of USD/JPY will see serious movement in the first three months of 2024. Markets are increasingly confident that U.S. interest rates have peaked and could see significant rate cuts next year. . This theory would tend to weaken the dollar across the board, especially given that other major central banks are still keen to keep borrowing costs at generational highs. In fact, I'm not sure if anyone, including perhaps the Bank of England, has completed the hike. Therefore, trading the yen would still effectively mean monitoring by the Fed. As long as these market expectations remain realistic, the dollar is likely to fall. As for the Bank of Japan, it is very unlikely to make any policy changes unless there are clear signs of domestically driven inflation. There is little of that at the moment, and in any case it will certainly take more than a quarter to get the BOJ to move. Yen traders should focus on Fed speakers as 2024 begins, as well as monthly Japanese inflation data, especially domestically driven price increases.

What about carry trades?

Given Japan's dismal onshore returns over the decades, the yen has been favored as a carry trade currency and sold to buy other units that offer better returns. The process of rising global interest rates is only accelerating. Lower U.S. interest rates are likely to eliminate some of the carry from the popular yen to the dollar, but the bottom line is that yield-seekers are still likely to shy away from the Japanese currency.