According to statistics, USD/JPY (US Dollar/Japanese Yen) is among the three most traded currency pairs in the Forex market. This is facilitated by the high liquidity of the pair, which ensures tight spreads and favorable trading conditions. This means that traders can enter and exit positions at minimal costs. In addition, the pair shows very high volatility, which provides excellent profit opportunities, especially in short-term and medium-term operations.
2023: Unfulfilled hopes
Throughout 2023, the Japanese currency has steadily lost strength against the US dollar, and thus, USD/JPY The pair trended upward. The yearly low was recorded on January 16 at 127.21, while the peak occurred on November 13, when one dollar traded for 151.90 yen.
We have repeatedly mentioned that the yen’s weakness is due to the Bank of Japan’s continued extreme dovish stance. It is understood that a negative interest rate of -0.1% cannot be attractive to market participants, especially against the backdrop of rising global yields and high rates set by central banks in other leading countries. For investors, it was much better to engage in a carry trade: borrow yen at low interest rates, then convert them into US dollars and Treasuries, making a nice profit due to the interest rate differential, all without any risk.
The monetary policy pursued by the Japanese government and the Bank of Japan in recent years clearly indicates that their priority is not the yen exchange rate, but economic indicators. Until mid-summer, in order to combat rising prices, regulators in the United States, the European Union and the United Kingdom tightened monetary policy and raised key interest rates. However, the Bank of Japan has ignored such tactics, even though the country’s inflation continues to rise. In June 2023, core inflation reached 4.2%, the highest level in more than four years. The only action taken by the Bank of Japan was to switch from strict to flexible targeting of the yield curve on Japanese government bonds, which did not help the national currency.
Instead of taking concrete action, Japanese Finance Minister Shunichi Suzuki, Bank of Japan Governor Kazuo Ueda, and Japan’s chief currency diplomat Masato Kanda actively engaged in verbal interventions. They and other senior financial officials have consistently emphasized in their speeches that everything is under control. They claimed that the government is “closely monitoring currency movements with a great sense of urgency and immediacy” and that it “will take appropriate measures against excessive currency movements, and is not ruling out any options.” Here are some quotes from Kazuo Ueda’s speech: “The Japanese economy is recovering at a moderate pace. (…) Uncertainty about the Japanese economy is very high. (…) The growth rate of inflation is likely to decline and then accelerate again. (But) overall, the Japanese financial system maintains stability. In short, interpret it however you want.
Winter-Spring 2023. At the beginning of the year, many market participants took promises of “immediate measures” seriously. They were optimistic about raising interest rates, which have been stuck at a negative level since 2016. In January, economists at Danske Bank predicted that after the interest rate increase, USD/JPY The pair will fall to 125.00 in three months. Analysts from the French bank Société Générale pointed to the same goal. Their colleagues from ANZ Bank did not rule out the possibility of the pair reaching around 124.00 by the end of 2023. According to BNP Paribas forecasts, the tightening of monetary policy was expected to stimulate the repatriation of funds by Japanese investors, which could lead to the possibility of deflation. USD/JPY The pair is set to fall to 121.00 by the end of the year. Economists from international financial group Nordea expected it to fall below 120.00. Strategists from Japan’s MUFG Bank and HSBC, the UK’s largest bank, also pointed to the potential for a significant strengthening of the Japanese currency.
Summer 2023. As time passed, nothing important happened. Commerzbank, a German bank, stated that the yen is a complex currency that is difficult to understand, perhaps due to the monetary policy of the Bank of Japan. Kristalina Georgieva, Managing Director of the International Monetary Fund, subtly hinted that “more flexibility in the Bank of Japan’s monetary policy would be appropriate.”
In the first half of the summer, market participants began to adjust their expectations. Economists at Danske Bank now expect this to happen USD/JPY The rate will be less than 130.00 over 6-12 months. Strategists at BNP Paribas gave similar forecasts, predicting a level of 130.00 by the end of 2023 and 123.00 by the end of 2024. Societe Generale’s forecast for July has also become more cautious. Analyzing the pair’s expectations, the bank’s experts expected that the yield on 5-year US Treasury bonds would fall to 2.66% within a year, allowing the pair to break below 130.00. If the yield on Japanese Government Bonds (JGB) remains at the current level, the pair may fall to 125.00.
The forecast for Wells Fargo, one of the “big four” banks in the United States, was considerably more modest, as its specialists targeted a wide range of banks. USD/JPY A rate of 136.00 by the end of 2023 and 129.00 by the end of 2024. MUFG Bank announced that the Bank of Japan may only decide to raise interest rates for the first time in the first half of 2024. Only then will the shift towards a strengthening yen occur. Regarding the recent change in yield curve control policy, MUFG Bank believes that it is insufficient in itself to stimulate the recovery of the Japanese currency. Danske Bank stated that it is not advisable to expect any steps from the Bank of Japan before the second half of 2024.
Fall and winter 2023. No one had any hope that the Bank of Japan would change its monetary policy before the end of the year. However, market participants are beginning to fear that a weaker yen will eventually rally Japanese officials to move from verbal interventions to actual actions.
the USD/JPY The pair was impatiently racing towards the critical mark of 150.00. Market participants clearly remembered that in the fall of 2022, when the pair reached a 32-year high of 152.00, the Japanese authorities began financial interventions. To make matters worse, a report issued by Reuters stated that Japan’s chief currency diplomat, Masato Kanda, had announced that banking authorities were considering intervention to end “speculative” movements.
Then, on October 3, when prices slightly exceeded the “magical” high of 150.00, reaching a high of 150.15, what everyone had been anticipating for a long time finally happened. In just a few minutes, USD/JPY The pair fell by about 300 points, stopping the decline at 147.28. Japanese Finance Minister Shunichi Suzuki declined to comment on the event. He vaguely stated that “there are many factors that determine whether movements in the currency market are excessive.” However, many market participants believe that this is real currency intervention. Although, of course, one cannot rule out mass automatic triggering of stop orders upon the breakout of the key level at 150.00, where “black swan” events were observed before.
Whatever the case, the intervention did not help the Japanese currency significantly, and after 40 days, it was once again trading above 150.00, at the level of 151.90. At this moment, on November 13, the trend reversed, and the yen’s strengthening became steady. This happened two weeks after yields on 10-year US Treasury bonds peaked when markets became convinced that their decline had become a trend. It is important to remember that there is traditionally an inverse relationship between these securities and the yen. If the yield on Treasury securities rises, the yen falls against the dollar, and vice versa: if the yield on securities falls, the yen strengthens.
The main reason for the return of the Japanese currency was growing expectations that the Bank of Japan will finally abandon its negative interest rate policy, perhaps sooner than expected. Rumors suggested that the country’s regional banks, which have been pushing to abandon their yield curve targeting policy, were putting significant pressure on the regulator.
The yen also benefited from market confidence in the stability of the key interest rates of the Federal Reserve and the European Central Bank, with them expected to fall only afterwards. As a result of this divergence, investors were expected to unwind their carry trade strategy and reduce the yield spreads between Japanese government bonds and US and Eurozone bonds. According to most analysts, all these factors were expected to lead to a return of capital to the yen.
The low for the fourth quarter was recorded on December 28 at 140.24, and subsequently USD/JPY He finished the year 2023 with a GPA of 141.00.
2024 – 2028: new forecasts
After three years of sharp decline, the value of the yen may finally be starting to turn around. That’s the opinion of market participants surveyed by Bloomberg. In general, participants expect the Japanese currency to strengthen next year, with expectations average USD/JPY Pointing to the level of 135.00 by the end of 2024.
Many banks expect the pair to trade in the 125.00-135.00 range (Goldman Sachs at 130.00, Barclays at 135.00, UBS at 132.00, MUFG at 125.00). Currency strategists at HSBC believe that the US dollar is currently overvalued and will return to its fair value over the next five years due to lower yields in the US and rising stock markets. HSBC experts expect the pair’s exchange rate to reach 120.00 by mid-2024 and fall to 108.00 by 2028. According to ING Group forecasts, the rate will fall to only around 120.00 in 2025.
However, there are also those who expect a further decline of the Japanese currency and a continuation of the “flight to the moon” for the pair. For example, analysts at the Economic Forecasting Agency (EFA) predict. USD/JPY To reach 166.00 by the end of 2024, 185.00 by the end of 2025, and 188.00 by the end of 2026. Wallet Investor forecasts indicate that the pair will continue its upward rise, reaching the level of 208.10 by 2028.
In conclusion, for those who prefer graphical analysis, it is worth mentioning that the behavior of… USD/JPY All of 2023 is almost perfectly consistent with Elliott Wave Theory. If the pair continues to follow the principles of this theory in 2024, we can first expect a bullish corrective wave B. This will be followed by a bearish impulse wave C, which could lead the pair to the levels expected by Japanese power advocates. currency.