The YEN-US Dollar exchange rate has fallen for four consecutive years

In 2024, the yen-dollar exchange rate has fallen for four consecutive years, tying the longest record in history. At the end of 2023, many market participants predicted that “the yen will appreciate in 2024”. However, contrary to the prediction, the yen depreciated to a historical low of 156 yen per dollar, mainly because the interest rate gap between Japan and the United States has not narrowed. The trend of expanding speculative yen selling remains, and there is a possibility of fluctuations from the beginning of 2025.

At the end of 2023 and the beginning of 2024, there were not many voices predicting that the yen would continue to depreciate. According to a survey conducted by Nikkei QUICK in January 2024, 29 of the 63 companies that responded predicted that “the yen appreciation will reach the highest level of the year by December 2024”. The high point of the exchange rate forecast range averaged 131 yen per dollar, an appreciation of the yen and a depreciation of the dollar.

However, the actual result is just the opposite. The yen exchange rate has fallen sharply from the 141 yen per dollar at the end of 2023. On December 31, 2024, the exchange rate hovered around 156 yen to the dollar, with a full-year decline of 10%, exceeding the 7% in 2023. The four-year consecutive depreciation of the yen tied the record of 2012 to 2015 before and after the start of “Abenomics”, and is the longest since Japan switched to a floating exchange rate system in 1973.

The misjudgment of market participants is that the interest rate differential between Japan and the United States has not narrowed as expected. Before 2023, the interest rate differential widened significantly due to the difference between the Fed’s continued interest rate hikes and the Bank of Japan’s (central bank) continued loose monetary policy. This triggered a “carry” transaction of borrowing low-interest yen and investing in high-yield assets.

Many views once believed that in 2024, the Fed would turn to interest rate cuts, while the Bank of Japan began to raise interest rates, and the interest rate differential would tend to narrow, which would curb the depreciation of the yen. However, the Fed’s interest rate cuts did not progress as fast as the market expected, and the US policy rate remained between 4.25% and 4.5%, 0.5% higher than expected at the beginning of the year.

The Bank of Japan postponed the interest rate hike at the monetary policy decision meeting in December 2024, and the policy interest rate gap between Japan and the United States is still over 4%. This interest rate gap is comparable to the period between 2006 and 2007 when carry trade was active.

The expectation that the interest rate gap will not narrow has further intensified the carry trade. Takumi Natani of Sumitomo Mitsui Bank of Japan pointed out: “If market volatility becomes stable, it is not impossible to reopen the yen carry trade.” In the market, the range of 160 yen per dollar and 161.90 yen per dollar as the low point in 2024 began to be seen as the next node of attention.