Capital Economics on Thursday shared insights on the performance of the Japanese yen against the US dollar, predicting a stronger year for the yen in 2025.
The analysis comes after a period of pressure on the yen, largely due to the policies of the US Federal Reserve (Fed) and the Bank of Japan (BoJ). Despite the Fed’s rate cuts and the BoJ’s rate hikes this year, the yen has weakened by approximately 10% against the dollar in 2024.
The recent hawkish stance of the Fed, which suggested only a 50 basis point easing in 2025, contrasted with the BoJ’s decision to pause its tightening cycle, has contributed to the yen’s decline.
This divergence in monetary policy was highlighted by a cautious tone from Fed Governor Powell and the BoJ’s reluctance to commit to further hikes. The result was a rise in US Treasury yields and a corresponding drop in the yen’s value.
Capital Economics points out that long-end Treasury yields have consistently posed a challenge for the yen throughout the Fed’s easing cycle, including Monday, despite more optimistic short-term prospects.
The 10-year US Treasury yield is expected to conclude the easing cycle at a higher level than it began, a rare but not unprecedented occurrence.
The analysis also notes that the 10-year Japanese Government Bond (JGB) yield has struggled to keep up with the Treasury yield, despite the BoJ’s rate hikes, which has led to the yen’s difficulties against the dollar.
Factors such as the anticipation of Trump’s election and potential tariffs and fiscal stimulus next year have influenced Treasury markets.
Looking ahead to 2025, Capital Economics anticipates a more favorable monetary policy environment for the yen. Although the Fed is likely to remain cautious about further rate cuts, enough easing is expected to maintain long-dated yields at their current levels.
On the other hand, the BoJ, under Governor Ueda’s data-dependent approach, may see a stronger push towards policy normalization than currently expected by investors, which could boost long-end yields and strengthen the yen. Capital Economics forecasts the yen to reach 145/$ by the end of 2025.
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