(News Bulletin 247) – The Japanese currency has suffered this year, weighed down by the ultra-accommodating monetary policy of the Bank of Japan. But according to market intermediaries interviewed by Bloomberg, the Japanese currency could regain momentum in 2024.

If Japanese stocks had a very good 2023 vintage, with the Nikkei 225 up 25.5% over the whole year, the same can hardly be said of the yen. The Japanese currency has lost 8% against the dollar since January 1, and 9.9% against the euro.

On the currency market, such movements are significant because exchange rate variations are contained (a currency loses value when it loses, for example, 1%) due to the enormous liquidity of this market on which exchanges can reach more than of 6,000 billion dollars per day.

However, the Japanese economy is doing well, with growth expected at around 2% this year by the International Monetary Fund (IMF).

The weakness of the currency is explained more by the large gap between the monetary policy of the Bank of Japan (BoJ) and that of other major central banks, which have tightened their policy and raised their rates where the Japanese institution still practices negative rates.

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End of last meeting Tuesday

Can the situation change next year and can the yen recover? Investors will get their first glimpse on Tuesday morning, as the Bank of Japan will deliver its monetary policy decision at the end of its last meeting of 2023.

In reality, speculation has already started to swell in recent weeks, with the market sensing that members of the Japanese central bank were beginning to prepare minds for the end of this hyper-accommodative monetary policy.

“Market speculation increased after BoJ Deputy Governor Ryozo Himino said on December 6 that an exit from ultra-free monetary policy, if done well, would be beneficial for the economy.” , notes UBS.

“Tomorrow’s BoJ meeting will be interesting given the amount of speculation about an end to negative interest rates in the new year and further adjustments to interest rate curve control,” Craig points out. Erlam of Oanda.

“This week probably comes too soon, but I would say this is another live meeting that could surprise many, if not by the form of the decisions, but potentially by the message” , he adds.

A currency divergence reversed?

Currency strategists are confident about the yen next year, according to a survey conducted by Bloomberg and published this Monday. While a dollar is currently worth 142.77 yen, these strategists see the pair weakening (and therefore the yen rising) with a rate of 1 dollar to 135 yen by the end of 2024.

The guiding idea remains simple: the American Federal Reserve (Fed) has now completed its rate hike cycle this year. Its president Jerome Powell even acknowledged that members of the Fed had discussed cuts during the last meeting of the American central bank. Investors anticipate key rate reductions of around 125 points (1.25%) next year.

If the Fed therefore lowers its rates next year and the Bank of Japan tightens its ultra-accommodating monetary policy and goes so far as to put an end to negative rates, the yen should logically benefit.

“It looks like bond yields have peaked, the Fed is done raising rates and the dollar is due to fall further in 2024,” Kit Juckes, chief currency strategist at Société Générale in London, told Bloomberg . “The yen is expected to post substantial gains,” he added.

Obviously, as with any forecast, risks exist. Also polled by Bloomberg, Daisuke Karakama, chief economist at Mizuho Bank Ltd, noted that Japan’s trade deficit means there will always be people in the market looking to sell the yen, even if the general trend is to the rise.

“The Japanese yen could perform well in the event of a hard landing (of the economy, editor’s note) in the United States, which would trigger a cycle of pronounced rate cuts by the Fed. However in our base scenario , which is counting on a soft landing, the progression of the currency should remain moderate in the first half of 2024″, estimates the Swiss bank Lombard Odier for its part.