The Japanese yen concluded its most challenging week against the US dollar in 16 months, impacted by the economic repercussions of a powerful earthquake that have shifted expectations around the Bank of Japan’s (BOJ) stance on negative rates. The currency experienced a decline of up to 0.9% against the greenback on Friday, exhibiting volatility in response to key US labor and ISM services data. Ultimately, the day concluded with little change, but the dollar-yen currency pair saw a notable 2.6% increase for the week, reaching 144.63, its highest level in over three weeks.
Following the earthquake that struck the Noto Peninsula on New Year’s Day, market participants anticipated that the BOJ would likely maintain its current policy to evaluate the economic impact of the disaster. Earlier speculations of the potential abandonment of negative rates this month were reconsidered in light of the seismic event.
Despite the recent setback, the yen is still widely perceived to strengthen in 2024, with a consensus estimate placing USD/JPY at 135, approximately 7% lower than its current levels. However, data from the Commodity Futures Trading Commission, released on Friday, revealed that hedge funds increased their bearish yen positions in the week ending January 2.
Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, noted that the earthquake has introduced uncertainty for the BOJ in timing potential interest rate moves. He expects the likely policy response to involve a pro-growth boost through fiscal spending.
While acknowledging the challenges posed by the recent events, Dowding remains confident in the prospect of policy normalization in Japan during 2024. He further forecasts that the yen will outperform other major currencies in the coming year.
