FX Focus - USDJPY: Japanese Yen – The Currency To Watch In 2024

The focus is back on the Japanese Yen (JPY) again this week when the JPY strengthened against the dollar bringing USDJPY from 147 to 141.6. So, what could have sparked this change? Firstly, Bank of Japan (BoJ) governor Himino had tried to play down the adverse effects of a rate hike while indicating that the BoJ had conducted a special survey of market participants, including a workshop to discuss the impact and side effects of exiting its Negative Interest Rate Policy (NIRP). BoJ Governor then mentioned that his job would likely be more challenging. Lastly, the BoJ potentially bringing forward its exit from the NIRP to its 19th December Meeting could also have contributed to this price action.
 

Ueda’s meeting with Kishida is significant as the PM himself seems determined to find ways to ease Japanese households’ erosion of purchasing power from higher inflation, partly caused by the weaker Yen. PM Kishida reportedly backs the higher wage demands by Japanese unions for 2024 and is trying to raise the purchasing power of pension recipients (who account for 40% of the population) through fiscal means. A stronger Yen would undoubtedly be welcome as it would likely lower the cost of imported goods for Japanese households.
 

Market’s expectation for the BoJ to exit NIRP sooner is not without merit given BoJ’s significant progress towards scrapping its yield curve control (YCC) policy. But, investors looking for Yen to strengthen sharply and quickly on hopes of the BoJ quickly exiting NIRP may face disappointment. Governor Ueda has stated he would like to see 2 conditions met first – (1) wage negotiations in 2024 that  translate to higher real wages, and (2) a softer landing in the US. While evidence surrounding a US softer landing looks increasingly clear, the domestic outlook still lacks clarity and, the BOJ can only unveil updated price forecasts in January which can potentially be used to support the case for policy change. Meanwhile, BoJ meetings in March and April would follow the results of next year’s labor union pay negotiations.
 

A more gradual shift in BoJ’s stance may slow the pace of Yen strengthening but there are other reasons to be cautious about how quickly the Yen could strengthen, including – (1) market’s current rate cut pricing for the Fed (as early as March 2024) looks aggressive and risks some walk back, albeit temporarily which would likely slow USDJPY’s descent; (2) With BoJ only at the very early stages of raising rates, it is unlikely this results in a mass Japanese repatriation into domestic assets, and (3) the sharp strengthening in Yen last week could be linked to year-end liquidation and these flows may not extend into 2024. That said, it seems likely that the path towards a sustainably lower USDJPY has been created even if it is at a more gradual and non-linear pace.