JPY Forecast For 2024

In 2023, the Japanese Yen (JPY) declined by over 20%, marking the year's biggest decline. However, reports suggest that JPY might reverse to a bullish trend in 2024. 

Our article will discuss the predictions traders should keep an eye on moving into the new year.

BoJ's policy shift to help JPY

The potential policy shift by the Bank of Japan (BoJ) in 2024 is expected to help the Japanese Yen (JPY). The most significant reason is BoJ's current ultra-loose monetary policy, including a -0.1% policy rate and Yield Curve Control (YCC), has kept the Yen weak. However, signals of a policy change, including the BoJ's consideration to lift rates and redefine its 10-year yield upper bound, setting the new reference point at 1%, have generated bullish momentum for the Yen.

If the BoJ exits its ultra-loose policy, it could lead to a rate increase of just 10 basis points, bringing rates out of negative territory. The divergence in monetary policies between the US and Japan, with the Fed potentially cutting rates while the BoJ lifts, is seen as a catalyst for the Yen's strength. Speculators have already shifted to a net short position against the Yen, and the BoJ watchers anticipate a policy shift, possibly in January or April 2024.

Fed rate cuts might increase JPY

The JPY is predicted to increase from the anticipated Federal Reserve rate cuts in 2024. The Federal Reserve is expected to maintain interest rates at a 22-year high. Still, the forecast suggests potential cuts of up to 75 basis points, signaling a shift from the previously hawkish stance. This anticipated change in Fed policy is expected to significantly strengthen the Yen, potentially reaching as high as 142.6 yen to the Dollar, with a gain of over 3 yen from the Tokyo market closing.

Anticipation of lower US interest rates and increased confidence in the BOJ's commitment to moving away from negative rates is expected to contribute to the Yen's strength. The US dollar index is forecasted to drop to its lowest level since 28 November 2023, reflecting the anticipated impact of the updated outlook from Fed officials. With most officials projecting lower federal funds rates, the market sentiment is predicted to shift in favor of the Yen.

JPY to remain low against the USD

The JPY is anticipated to remain low against the USD in 2024 due to the recent weakening of the Yen, breaching the key 150 threshold against the USD, which is now attributed to the Bank of Japan's relaxation of its yield curve control (YCC) policy. 

The widening interest-rate spread between the US and Japan and the Federal Reserve adopting a higher for longer stance contribute to the Yen's downward trend moving into 2024. The ongoing negative interest rates in Japan stand in contrast to positive long-term US rates, creating conditions for continued Yen depreciation against the Dollar. Analysts suggest that the Yen's decline may persist well into 2024, considering the apparent lack of urgency in abandoning negative interest rates.

While optimism exists for a potential rate hike in Japan next year, the prevailing economic landscape and policy disparities with other central banks suggest a significant appreciation of the Yen against the USD is unlikely. The persistently weak Yen has varying impacts on industries, with exporters having an advantage while Tokyo scales down military spending due to rising costs. 

JPY to reverse from its low in 2023

The JPY is expected to reverse from its low in 2023, marking a pivotal moment in 2024. Verbal warnings by Japanese officials are anticipated to limit JPY downside, serving as a signaling effect to alleviate depreciation pressure. The unsustainable nature of the YCC designed to combat deflation prompts predictions of additional policy tweaks in 2024, potentially leading to the abandonment of the YCC. As Japan witnesses wage growth in 2024, the prolonged battle with deflation may end, supporting a potential shift in the JPY's trajectory toward the upside.

Anticipated FX intervention and an impending policy shift against high inflation contribute to the optimism for strong JPY outperformance. The Ministry of Finance's verbal warnings create an intervention zone for USD/JPY, likely preventing the JPY from depreciating further. The divergence in monetary policies between the Bank of Japan (BOJ) and global central banks, coupled with rising inflation in Japan, suggests a turning point for the JPY. The JPY's extreme weakness, reflected in the real effective exchange rate (REER) at an all-time low since 1970, also adds to the conviction that 2024 will see a turnaround. 

High Japanese government bonds to increase JPY

The expected appreciation of the Japanese Yen (JPY) in 2024 is closely tied to the dynamics surrounding Japanese Government Bonds (JGBs) and its increase in interest rates up to 0.775%, the highest since 2013. The Bank of Japan (BOJ) has signaled a gradual departure from its ultra-easy monetary stance and a potential move away from Yield Curve Control (YCC). This shift implies adjustments in monetary policy that may lead to an increase in JGB yields.

According to Nikkei Asia, as the BOJ considers abandoning YCC and possibly tightening its monetary policy, the yields on JGBs are likely to adjust upward. Higher yields on government bonds can attract investors seeking better returns, leading to increased demand for JGBs.

The rise in JGB yields, driven by BOJ policy adjustments, is anticipated to contribute significantly to the appreciation of the JPY. Even the Wall Street Journal explores how investors favoring higher yields may allocate capital to Japanese bonds, thereby increasing demand for the Japanese currency valuation in 2024.

Is it a good time to invest in JPY?

With the JPY hovering around its lowest price in the past few years, the country is expected to come out of its decades-old deflation. It could mark a bullish reversal for the currency and enable traders to gain from the it moving into 2024.