After two years of enduring relentless declines, the Japanese yen may finally be poised for a turnaround. Analysts and market strategists predict the yen could strengthen against the US dollar, fueled by anticipated policy shifts from the Bank of Japan (BOJ) and the Federal Reserve (Fed). However, the outlook is far from certain, with market volatility, economic uncertainties, and political factors like Donald Trump’s potential return to the White House adding layers of complexity.
Since early 2022, the yen has faced significant depreciation, sliding to levels last seen decades ago. In mid-November 2024, it traded at 154.73 to the dollar, a steep drop from its 2023 highs. Hedge funds and investors have increasingly bet against the yen, leading to bearish positions on the currency.
The dollar’s strength has been bolstered by persistent US rate hikes in response to inflationary pressures, making the yen less appealing to global investors. Compounding this was Japan’s policy of negative interest rates, which contrasted sharply with tightening monetary policies in major economies like the United States and Europe.
Optimism is returning for yen bulls, with strategists from Mizuho Securities, Nomura Securities, and Saxo Markets projecting the currency to strengthen significantly by 2025.
Mizuho Securities: Analysts Masafumi Yamamoto and Masayoshi Mihara foresee the yen surging to 130 against the dollar by the end of 2025. They attribute this to narrowing interest rate differentials between Japan and the US as the BOJ hikes rates while the Fed cuts them.
Nomura Securities: Yujiro Goto predicts a more tempered yen rebound to 140, citing Japan’s potential interventions to curb excessive FX volatility.
Saxo Markets: Charu Chanana projects similar levels, highlighting the potential for a slower US economy to drive the Fed into rate cuts.
These forecasts stand in stark contrast to current market sentiment, where the yen remains under pressure due to strong US dollar demand and Japan’s capital outflows.
The expected rebound hinges largely on the actions of the BOJ and the Fed.
Bank of Japan: After years of ultra-loose monetary policy, the BOJ has signaled a gradual shift towards tightening. Analysts anticipate the central bank may continue raising rates every six months, aiming to combat inflation and stabilize the currency. BOJ Governor Kazuo Ueda, while cautious, has hinted at the possibility of further rate hikes depending on economic conditions.
Federal Reserve: The Fed’s policy direction will be a key determinant for the yen’s trajectory. With inflation showing signs of cooling, traders see an 80% likelihood of rate cuts by January. However, Fed Chair Jerome Powell has emphasized that economic resilience could slow the pace of easing. Should the Fed delay rate cuts or inflation pick up again, the dollar could remain stronger than anticipated.
Donald Trump’s potential return to the White House is another wildcard. His previous presidency brought sweeping tax reforms, deregulation, and trade tariffs, significantly impacting global markets. If Trump resumes such policies, the dollar could see renewed strength, complicating the yen’s recovery.
“Trump’s tariffs could support the yen relative to other currencies due to rising global trade uncertainty,” said Nomura’s Goto. However, Trump’s broader economic policies, including potential fiscal stimulus, might boost the dollar, counteracting yen gains.
Despite the bullish projections, analysts caution against viewing the yen’s rebound as a certainty.
US Economic Resilience: If the US economy avoids a slowdown, the Fed may not cut rates as aggressively as anticipated, keeping the dollar strong.
Japan’s Capital Outflows: Japan’s capital outflows currently outweigh its current account surplus, exerting downward pressure on the yen. Mitsubishi UFJ Morgan Stanley projects the yen to remain at 154.50 by the end of 2025 due to this imbalance.
Geopolitical and Market Volatility: Unexpected events or shifts in investor sentiment could create headwinds for the yen. “It will not be a one-way trade,” noted RBC Capital’s Alvin Tan, emphasizing the uncertainties surrounding Fed rate cuts and Trump’s tariffs.
If the yen does strengthen, the impact would ripple across various asset classes and sectors:
Japanese Equities: A stronger yen typically weighs on Japan’s stock market, as it reduces the competitiveness of export-driven companies. Investors might see downward pressure on indices like the Nikkei 225 and the TOPIX.
Overseas Investments: A rising yen would deter the use of the currency for carry trades, where investors borrow yen to invest in higher-yielding assets abroad. Conversely, it could encourage Japanese investors to repatriate funds.
Corporate Acquisitions: Japanese companies, flush with cash, would find overseas acquisitions more attractive due to improved purchasing power.
Trade Balance: A stronger yen makes Japanese goods more expensive for foreign buyers, potentially narrowing the country’s trade surplus.
Japanese authorities remain vigilant against excessive FX volatility. Atsushi Mimura, Japan’s chief currency official, and Finance Minister Katsunobu Kato have warned of potential interventions to stabilize the yen. Verbal warnings have historically tempered speculative attacks, and direct intervention remains a possibility if volatility spikes.
For now, the yen’s path remains uncertain, caught between central bank policies, geopolitical risks, and market dynamics. While a recovery seems plausible, the journey will likely be fraught with challenges.
As Alvin Tan aptly put it, “Our baseline is for the yen to rebound as US interest rates fall back gradually. But Trump’s election is a major wild card now.” Investors will need to navigate these uncertainties carefully, keeping a close eye on economic signals, policy announcements, and global developments.
One thing is certain: the yen’s fortunes in 2025 will be a litmus test for the interplay of monetary policy, market sentiment, and political influence on the global stage.
