Traders are revising their outlook on the yen following recent policy announcements by the Federal Reserve and Bank of Japan (BOJ). Initially, market sentiment favored a stronger yen in 2025. However, recent developments suggest prolonged interest rate differentials between the US and Japan. Discover why the yen weakens as the Federal Reserve and BOJ delay narrowing the rate gap.
BOJ Governor Kazuo Ueda indicated that the central bank might delay its next rate hike. Meanwhile, the Federal Reserve hinted at maintaining a slower pace of monetary easing. These factors have dampened optimism for the yen's appreciation in the near term.
Metrics reveal a decline in yen bullishness, marking the least positive sentiment in a month. Leveraged funds increased net short positions on the yen, reaching the highest levels since July. This shift highlights growing skepticism about the yen’s recovery prospects.
READ: Yen Slides More Than 1% to Weakest Since July
Strategists from Mizuho Securities and Mitsui Sumitomo Insurance have adjusted their dollar-yen forecasts. Mizuho now predicts 145 by late 2025, while Mitsui Sumitomo Insurance revised its estimate to 140. Both institutions attribute their revisions to the Fed’s hawkish stance and the BOJ’s dovish approach.
The yen recently fell to 157.93, its lowest level since July, as Governor Ueda emphasized the need for more data on wages. Analysts warn that continued BOJ inaction could further weaken the yen, possibly reviving the yen carry trade. This strategy, where investors borrow yen to invest in higher-yielding assets, poses risks of market instability.
READ: Yen Carry Trade That Rattled Markets Shows Signs of a Comeback
Some experts predict that the yen may reach 160 against the dollar in the near term. This level could prompt intervention from Japan’s finance ministry or even an earlier BOJ rate hike. However, most strategists expect the BOJ to delay further action until March or later.
“The narrowing yield gap has been postponed, so yen appreciation might also shift to late 2024,” noted Charu Chanana, chief strategist at Saxo Markets.
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