The yen will likely rise, but thanks to the Fed, not the Bank of Japan

This article is intended only to delve into the basic prospects of yen. For a comprehensive understanding of the Japanese currency’s technical outlook and price action signals, download the full Q1 forecast.

Market Conclusion: Bank of Japan hopes to raise interest rates sent the yen lower

The yen received an end-of-year boost from hopes that the Bank of Japan will raise interest rates, perhaps at a time when the Federal Reserve is cutting rates. The currency’s fortunes in 2024 will depend on how these two possibilities play out. Both can obviously be intermittent, but the former seems more vulnerable.

The Japanese yen has long suffered from the Bank of Japan’s position as an anomalous policy. For decades, the central bank has tried to stimulate domestic demand, and raise inflation slightly, through more flexible monetary settings in the developed world. It has had mixed success. However, the recent global inflationary wave has not left Japan completely unscathed. Therefore, the yen benefited from market hopes that the Bank of Japan might be inclined to join the global trend towards raising interest rates. Back in July, it went so far as to adjust its yield curve control plan, allowing 10-year local government yields to rise more strongly, but still effectively capping them at 1%. Since then, the foreign exchange market has been wondering whether actual interest rate increases might follow, and this process has tended to support the yen, even as the US Federal Reserve looks like it has reached the top of its rate hike cycle. His own. . However, the Bank of Japan has kept its key interest rate at negative 0.1% until 2023, and there appears to be little sign that it will change this policy in the first quarter of the new year.

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Key drivers: Listen to the Fed, watch Japanese inflation

The ‘USD’ side of the USD/JPY is likely to be where the real action will be in the first three months of 2024. Markets are increasingly certain that US interest rates have peaked and that next year will see cuts, Maybe it’s too big. This hypothesis will tend to weaken the dollar across the board, especially since other major central banks remain intent on keeping their borrowing costs steady at their highest levels in generations. In fact, it is not at all certain that some have finished hiking, perhaps including the Bank of England. So, trading the yen will likely still mean practically watching the Fed. As long as these market hopes are realistic, the dollar will likely drift lower. As for the Bank of Japan, it is unlikely to make any policy shift unless there are clear signs of domestically driven inflation. Since there are so few of them at present, it would almost certainly take more than one quarter to prompt the Bank of Japan to act anyway. Yen traders should focus on Fed spokespeople heading into 2024, as well as Japan’s monthly inflation data, with a particular focus on domestically driven price rises.

What about carry trade?

Given decades of miserable domestic returns in Japan, the yen has been a favored currency in carry trading, selling to buy other units offering better returns. The process has accelerated, leading to a rise in the global rate. While lower US interest rates will likely lead to some pullback in the yen’s movement against the dollar, the bottom line is that those looking for yield will likely avoid the Japanese currency.