The
Japanese yen experienced significant growth at the end of 2023, appearing to
mark a long-awaited turning point as it broke away from the previous year’s
trend. The USD’s drop was easy to explain. However, following the New Year, the
situation took a sudden turn. Let’s delve into why the US dollar reclaimed its
position and what happened with the yen.
In
December, the yen was the preferred choice for bulls, which is pretty
understandable. In 2022 and 2023, the Japanese currency stood out among major
currencies because of its adherence to a negative interest rate policy. It’s an
exception to the rule, as you realize.
At the
end of 2023, it seemed like the turning point had been reached. The USD
to JPY rate saw a nearly 6% decrease in November and December.
The
chart above represents two key moments. The first one is linked to the
expectations that the Federal Reserve will initiate a rate-cutting cycle in
2024, potentially reducing interest rates at least three times. The second
reflects the expectations surrounding the Bank of Japan’s policy. Many experts
forecasted that the BoJ would abandon its negative rate approach. This
contrast allowed the yen to make an encouraging leap.
In 2024,
this movement should have been continued. But one month was enough for the US
dollar to recover the most losses.
To
understand the scale of the problem, take a look at the chart below, which
illustrates the USDJPY movements since the start of 2022. That’s what happened
to the currency, traditionally considered a safe haven alongside, for instance, the Swiss
franc.
The
chart above provides insight into why market participants anticipated changes
from the BoJ. However, it didn’t happen at the central bank’s January meeting.
The regulator also continued its yield curve control policy, maintaining a
1%-as-a-reference yield cap on 10-year government bonds. Plus, there was a
slight decrease in the inflation rate, diverting attention from the potential
rise in interest rates.
Another
factor affecting USD/JPY was the increase in retail sales data in the US.
Higher consumer spending allows the Fed to maintain higher interest rates.
After
all these developments, USD/JPY returned to roughly the same level as a few
months prior. In other words, investors still expect a potential interest
rate decrease by the Fed and a contrasting move by the BoJ. If so, perhaps it’s
an opportune moment to have faith in the yen.
As
you’re aware, the forex market situation can change rapidly, even within this
text. Hence, any decision should be based on your own analysis and opinion.