[Super Enjeo]⑤ "143~159 Yen Expected in Second Half"... US-Japan Interest Rates Are Key

US Interest Rate Cuts, Japan Interest Rate Hikes... Q3 as a Turning Point
"Structural Factors Make a Strong Bullish Shift Difficult"
Expected to Stay in the 150 Yen Range Until Year-End

Experts view the third quarter as a turning point that will determine the flow of the Japanese yen. This is because interest rate decisions by the U.S. Federal Reserve (Fed) and the Bank of Japan (BOJ) are upcoming. If the U.S. cuts interest rates in September and the BOJ either raises rates or signals a rate hike at the July 31 meeting, the yen could strengthen in the short term. However, structural factors in the Japanese economy, such as trade deficits and sluggish domestic demand, are expected to limit the magnitude of any rate hikes. A strong yen rally is unlikely to occur by the end of this year.

The Fed has four scheduled interest rate decisions this year in July, September, November, and December, while the BOJ has four in July, September, October, and December. The market currently expects the U.S. to cut rates in September, and the scale of the BOJ's bond purchase reduction announced in July is seen as a key factor in predicting the yen's future direction.

Jung Young-sik, head of the International Macroeconomics and Finance Division at the Korea Institute for International Economic Policy, said, "Since the Fed is highly likely to cut rates in September, the yen could rebound once the rate cut is confirmed. Also, if the BOJ's quantitative easing tapering announced in July is larger than market expectations, it will help calm the yen's depreciation."

Park Sang-hyun, a researcher at Hi Investment & Securities, explained, "It is difficult to reverse the yen's depreciation trend solely through government interventions such as the BOJ's bond purchase reduction. Fundamentally, the BOJ needs to signal a shift toward tightening, and the U.S. must also cut rates for the yen's direction to change."

Even if Japan raises interest rates in the second half of the year, the increase is expected to be limited. Jeon Kyu-yeon, a researcher at Hana Securities, said, "Japan has experienced deflation for a long time, so escaping deflation is a priority, and the policy stance is to first confirm a virtuous cycle in inflation. Therefore, even if rates rise until next year, the increase will not be significant."

Accordingly, the extent of yen appreciation is also expected to be limited. Jeon said, "If the Fed gradually cuts rates and the BOJ raises rates, the interest rate differential will narrow, influencing the yen's direction. However, due to structural weakness factors, the appreciation will be limited."

Kim Chae-yoon, a senior researcher at NH Investment & Securities, also said, "Even if the BOJ raises the benchmark interest rate, the yen's appreciation will be limited."

Park added, "The interest rate differential still exists, and fundamentally, the yen carry trade (borrowing low-interest yen to invest in high-interest stocks and bonds abroad) needs to be unwound for the yen to strengthen, but whether this will happen is uncertain. Due to the U.S.-Japan interest rate gap and Japan's domestic economic issues, a very strong yen rally is unlikely."

The yen is expected to stay around 150 yen per dollar until year-end... Defense line at mid-160 yen range

The yen is expected to remain around the 150 yen per dollar level in the second half of the year. Jeon said, "Even if the yen declines, it will be limited to the low 150 yen range. Structural weakness factors exist, so apart from minor rate hikes, the BOJ's actions are limited, and the yen is likely to stabilize rather than strengthen significantly until next year."

Kim Chan-hee, a researcher at Shinhan Investment Corp., said, "By the end of the third or fourth quarter, Japan's economy is expected to reach a recovery phase, and if U.S. rate cuts become visible, yen appreciation is possible. However, the decline will not be large, and the yen will remain in the low 150 yen range by year-end." Kim Chae-yoon of NH Investment & Securities also said, "The expected exchange rate band for the second half of this year is 143 to 159 yen per dollar."

However, if geopolitical risks and supply chain fragmentation cause global economic instability, the yen, a traditional safe-haven asset, could see increased demand and turn stronger. Jung said, "Factors increasing uncertainty compared to before include rising nationalism, supply chain fragmentation, geopolitical risks, and continued high interest rates and monetary policy divergence. If global economic shocks, instability, or geopolitical risks reemerge alongside changes in U.S. and Japanese monetary policies, the yen could turn stronger."

The foreign exchange authorities' defense line for the yen is expected to be in the mid-160 yen range. Recently, the yen has frequently surpassed 160 yen per dollar, which was the psychological defense line for Japan's foreign exchange authorities, leading to an upward adjustment of the defense line. Kim Chan-hee said, "The Japanese government currently tolerates 160 yen. If the pace toward the mid-160 yen range accelerates and the rise intensifies, foreign exchange authorities are expected to intervene."