jlk – The Japanese Yen (JPY) is one of the most heavily traded currencies in the world, primarily due to Japan’s role as a global economic and financial center.
The exchange rate of the yen against the US dollar (USD) is heavily influenced by various factors, such as monetary policies, trade conditions, and geopolitical situations.
In 2022, the Japanese yen experienced a significant decline against the US dollar, reaching its lowest level since 2002 at below 141.00 in early December 2023. This decline was attributed to several reasons, including:
Differences in monetary policies between the Bank of Japan (BOJ) and the Federal Reserve (Fed).
The BOJ continues to implement highly accommodative monetary policies, including negative interest rates and large-scale asset purchases, to stimulate inflation and economic growth.
Meanwhile, the Fed raised its benchmark interest rates four times in 2023, reflecting the strength of the US economy and higher inflation expectations.
This difference widened the interest rate differential between the two countries, making the US dollar more attractive than the Japanese yen to investors.
Global demand recovery after the COVID-19 pandemic
The COVID-19 pandemic that swept the world in 2020-2021 had a negative impact on global economic and trade activities, benefiting the Japanese yen as a safe-haven currency.
However, with progress in vaccination and fiscal stimulus in various countries, global demand began to recover in 2022, especially from China, Japan’s major trading partner.
This drove Japan’s exports to reach a record high in January 2024, totaling 7.33 trillion yen, up 11.9% from the previous year.
Japanese exports also benefited from the weakened yen, making Japanese products more competitive in the international market.
Geopolitical uncertainty and risks
In addition to economic factors, the yen’s exchange rate is also influenced by geopolitical factors and risks, such as trade tensions, regional conflicts, and political crises.
In 2022, some events causing uncertainty and risks included: the trade war between the US and China, the debt crisis in Turkey, nuclear tensions in North Korea, and leadership changes in Germany and Japan.
During periods of uncertainty and risk, investors tend to seek safer assets, such as the US dollar, gold, or government bonds, rather than the Japanese yen.
However, in 2024, the Japanese yen is expected to strengthen against the US dollar due to the following factors:
Changes in BOJ monetary policy.
The BOJ is expected to exit its negative interest rate policy in 2024, amid increasing inflation pressures and economic growth in Japan.
This would reduce the interest rate differential with the Fed, which is expected to lower its benchmark interest rates three or four times in 2024.
As a response to the US economic slowdown and the impact of the Omicron COVID-19 variant.
This change in monetary policy will increase the attractiveness of the Japanese yen to investors, who anticipate currency appreciation.
Official interventions to prevent the yen from weakening too much
The Japanese government and the BOJ may intervene in the foreign exchange market to prevent the yen from weakening too much against the US dollar, which could harm the Japanese economy in the long run.
A significantly weakened yen could increase import costs, reduce consumer purchasing power, and trigger protests from rival countries feeling disadvantaged by Japan’s competitive advantage.
Therefore, the Japanese government and the BOJ may set upper limits for the yen’s exchange rate.
For example, around 152 per US dollar, which is the highest level since 2002, and engage in yen purchases or US dollar sales if the exchange rate approaches or exceeds this limit.
Technical and psychological factors
Technical and psychological factors can also influence the yen’s exchange rate, such as chart patterns, trend indicators, market sentiment, and market participants’ expectations.
In 2024, the Japanese yen may receive support from several technical and psychological factors, such as:
Double top pattern
On the USD/JPY daily chart, a double top pattern formed in late October and early November 2023, when the pair reached levels below 152 twice but failed to break through.
This pattern indicates a decline in buying interest and a potential trend reversal.
If the pair breaks the pattern’s neckline, around 149, the next downward target is around 146, which is the difference between the peak level and the neckline.
Trend indicators.
Trend indicators, such as moving averages (MA), can be used to identify the direction and strength of trends.
On the USD/JPY daily chart, it can be observed that the pair is below the 50-day MA and the 200-day MA, indicating a downward trend.
Additionally, the 50-day MA crossed below the 200-day MA at the end of January 2024, known as a death cross, which is a strong bearish signal.
Market sentiment.
Market sentiment, the collective attitude of market participants towards a particular asset, can be measured in various ways, such as surveys, options, or trading positions.
One way to measure market sentiment towards USD/JPY is by using retail traders’ net-long or net-short positions provided by DailyFX.
This data shows that on February 22, 2024, 27.24% of retail traders were net-long on USD/JPY, while 72.76% were net-short.
Since DailyFX typically takes a contrarian view of market sentiment, the fact that traders are net-short indicates that the USD/JPY price may continue to rise.
Based on the above factors, the median forecast collected by Bloomberg indicates that the Japanese yen will strengthen to 135 against the US dollar by the end of 2024.
However, this exchange rate is subject to change depending on economic, political, and health developments in both countries, as well as global market dynamics.
Therefore, market participants must remain vigilant and flexible in the face of yen exchange rate fluctuations.