[Global Focus] "128 Yen VS 160 Yen"... How Far Will the Dollar-Yen Exchange Rate Go?

"Real Effective Exchange Rate and Economic Recession
Expected to Rise to 128 Yen by June Next Year"
"Possibility of Yen Depreciation Shock Similar to Last Year
Could Reach 160 Yen per Dollar
Growing Uncertainty in Yen Direction Deepens Investor Concerns"

Last month, the yen exchange rate briefly surpassed 145 yen per dollar but has since fallen back to the 138 yen range, intensifying market confusion. As the yen's value plummeted, the Japanese government hinted at market intervention; however, with no signs of official action, the sudden rebound of the yen has left the market unsettled. This is understood to be influenced by expectations that the Bank of Japan (BOJ) will adopt a hawkish stance at its policy meeting scheduled for the 24th of this month. Nevertheless, expert opinions remain divided. The decline in the yen's value is a key investment point for domestic individual investors, and growing uncertainty about the yen's direction has deepened their concerns.

"Expectations for BOJ Monetary Policy Revision"... Yen Recovers to 130 Yen Range After a Month

On the 18th, in the Tokyo foreign exchange market, the yen-dollar exchange rate was recorded at 138.64 around 7:05 a.m. The yen exchange rate had risen to 145 yen intraday on the 30th of last month, but over the past week, the yen's value has increased by more than 5 yen, dropping below the 140 yen level as of the 12th. The yen's recovery to the 130 yen range is the first in a month since the 12th of last month.

Bank of Japan (BOJ)

The rise in the yen's value is analyzed to be driven by expectations that the BOJ may change the direction of its accommodative monetary policy, which it has maintained for 10 years. The Nihon Keizai Shimbun explained, "There is an increasing movement to buy yen amid forecasts that the BOJ may review financial easing policies such as the yield curve control (YCC) policy."

The easing of inflation in the United States also had an impact. The calming of U.S. prices could reduce the Federal Reserve's (Fed) tightening intensity, which had signaled two interest rate hikes this year. This market expectation is reflected in the decline of the dollar's value. When the dollar weakens, the yen tends to strengthen relatively. According to Bloomberg, the 'Dollar Index,' which represents the average value of the dollar against six major currencies, closed at 99.96 on the 14th. The Dollar Index falling below the 100 mark is the first time in about 1 year and 3 months since April 21 of last year.

From the BOJ's perspective, this development is a relief. Finance Minister Shunichi Suzuki stated on the 28th of last month, when the yen's value sharply dropped, "There have been somewhat one-sided movements recently in the foreign exchange market," and "We will respond appropriately to excessive movements," but due to various factors, intervention may not be necessary. The BOJ had purchased about 9 trillion yen (approximately 82 trillion won) worth of yen several times last year. At the time of the initial market intervention, the yen exchange rate was 145.898 yen.

Safe-Haven Yen Rises Amid Economic Recession Impact... Expected to Reach 135 Yen by Year-End

In this situation, expert forecasts are divided. Some predict that the current strong trend will continue due to the global economic recession. As the economies of major countries contract, the preference for the relatively safe-haven yen is expected to increase.

[Image source=Bloomberg]

Viraj Patel, strategist at Bandari Research, said, "The risk of a global economic recession is increasing, and the possibility will grow further toward the end of this year and into next year," forecasting that if the recession materializes, the yen's value will rise about 20% against the dollar. The yen has been used as a hedge when uncertainty in the U.S. financial market increases. In March, when the financial system crisis triggered by Silicon Valley Bank (SVB) struck globally, the yen's value, which had hovered around 137 yen before SVB's collapse, jumped to the 131 yen range.

The fact that the yen is showing its weakest value in about 50 years also adds to its investment appeal. According to Bloomberg, as of May 1, the yen's real effective exchange rate was 73.1, the second-lowest level after the lowest recorded before the adoption of the floating exchange rate system in 1973 (67.9). This is far below the 50-year average of 113.6. The real effective exchange rate indicates the actual purchasing power of a country's currency relative to other countries. A value below 100 means the currency is undervalued.

Experts predict that based on the low real effective exchange rate and the economic recession, the yen's value will rise to 135 yen by the end of the year. A Bloomberg survey of economists on exchange rate forecasts showed that most respondents expect the yen to start at 138 yen in September this year and rise to 128 yen by June next year.

There are also views that the yen could strengthen even more. Dominic Schneider, Global Head of Foreign Exchange and Commodities at UBS, said, "The yen is expected to surge to the 128 yen range by the end of this year," explaining that the timing of the U.S. economic recession will be a key factor determining the yen's exchange rate fluctuations.

Widening U.S.-Japan Interest Rate Gap... Yen Could Fall to 160 Yen

Contrary to these rosy forecasts, there are predictions that a yen depreciation shock similar to last year could hit the Japanese foreign exchange market. The main reason is the possibility of the yen weakening due to the widening interest rate gap between the U.S. and Japan caused by U.S. interest rate hikes.

Former Japanese Vice Minister of Finance Eisuke Sakakibara, known as "Mr. Yen," warned that the yen-dollar exchange rate could rise to 160 yen per dollar, the highest level in 32 years, next year. In an interview with Bloomberg on the 7th, he said, "The divergent monetary policies of the U.S. and Japan have widened the interest rate gap between the two countries, strengthening the selling pressure on the yen," expressing concern that "the yen's value could continue to decline until the BOJ shifts to a tightening monetary policy."

Former Vice Minister Sakakibara served as Vice Minister of Finance during the Asian foreign exchange crisis in the late 1990s. He aggressively intervened in the foreign exchange market during his tenure, significantly lowering the yen's value, earning him the nicknames "Currency Tsar" or "Mr. Yen." He accurately predicted in June last year that the yen would surpass 150 yen per dollar. Later, in October of the same year, he forecasted the yen could fall to 170 yen, but due to the BOJ's monetary policy revision and market intervention, the yen's value rose to the 120 yen range earlier this year.

On the 7th, JP Morgan revised upward its previous forecast that the yen would fall to 142 yen by the end of this year, now predicting a decline to the 152 yen range. Bank of America (BoA) predicted that the yen would weaken slightly by about 4% to 145 yen during the same period. Bloomberg reported, "Asset managers increased their bets on yen weakness again last week," adding, "Many on Wall Street still lack confidence in forecasts that the yen's value will rise."