Title: USD/JPY Q4 Outlook: Data and Politics Will Chart the Course
Original Author: Matt Weller, CFA, CMT (as published on FOREX.com)
As the fourth quarter of 2024 unfolds, attention turns to the USD/JPY currency pair, which continues to be shaped by a blend of macroeconomic data, central bank policies, and increasing political uncertainty on the global stage. Looking back, USD/JPY has spent the better part of 2024 grinding higher, reaching levels not seen since the early 1990s. This trend has been driven by the divergence in monetary policy between the U.S. Federal Reserve and the Bank of Japan, as well as broader economic performance differentials. But as we move into the final months of the year, a complex mix of fundamentals will influence the trajectory of this highly watched forex pair.
Below, we examine the main drivers likely to impact USD/JPY through the end of the year.
Monetary Policy Divergence Still Dominates
The core fundamental force behind the dollar-yen pair this year has been the stark contrast in monetary policy between the U.S. and Japan:
– The U.S. Federal Reserve has maintained high interest rates to combat inflation, holding the benchmark rate above 5%.
– In contrast, the Bank of Japan continues to adhere to an extremely accommodative monetary policy. Despite some minor tweaks to its yield curve control (YCC) framework, short-term interest rates in Japan remain below zero.
This policy divergence has widened yield spreads between U.S. and Japanese bonds:
– The U.S. 10-year Treasury yield remains elevated near multi-year highs, offering attractive rates for fixed income investors.
– In contrast, Japan’s 10-year government bond yield is capped—hovering around 0.7–0.8%—due to BOJ interventions.
The result is a persistent demand for yield differential trades, where investors borrow in yen and invest in higher-yielding U.S. assets. This so-called “carry trade” continues to support a stronger U.S. dollar versus the yen.
However, recent communication from the Federal Reserve has introduced some uncertainty:
– Federal Reserve Chair Jerome Powell and other board members have suggested that the U.S. central bank may be nearing the end of its tightening cycle.
– Future rate hikes are no longer guaranteed, and market pricing now points to potential cuts in the first half of 2025.
Consequently, if the market becomes more convinced that Fed policy is shifting toward easing while the BOJ becomes more hawkish, the current trend in USD/JPY could slow or even reverse.
Intervention Risk from Japanese Authorities
Throughout the year, Japanese policymakers have expressed concern about rapid yen depreciation. Historically, Japan has been known to intervene in the currency market when yen weakness threatens domestic stability.
Recent developments worth noting include:
– In late 2022 and early 2023, the Ministry of Finance (MOF) in Japan conducted several interventions when USD/JPY approached the 150 level.
– As of Q4 2024, USD/JPY has again traded close to or above 150. Analysts and traders are closely watching this threshold as a potential trigger for further intervention.
While no formal rule exists, Japan tends to escalate verbal and direct action when:
– Moves in USD/JPY are sharp or disorderly
– The yen’s weakness begins to impact consumer sentiment, given Japan’s reliance on imported fuel and food
So far, interventions have had short-term impact but have been unable to change the underlying trend. This is largely because they are not complemented with significant policy shifts at the Bank of Japan. Most FX strategists believe intervention alone, without interest rate increases, is unlikely to provide sustainable support for the yen.
Japanese Economic Indicators Show Signs of Life
For much of the past decade, Japan has struggled with low inflation, sluggish economic growth, and stagnant wage increases. But the economic landscape is beginning to shift.
Recent improvements include:
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Explore this further here: USD/JPY trading.