The Yen(JPY)exchange rate continues to rise

The yen is appreciating against a wide range of currencies. The yen has risen the most among the major currencies known as the G10 currencies, judging by the rise and fall of the Nikkei Currency Index as of February 6. There are concerns about the impact of Trump’s tariff hikes, but Japan is considered a relatively less affected country, making it a safe haven for funds. However, there are doubts about the sustainability of the yen’s appreciation.

In the foreign exchange market, the yen has appreciated against a wide range of currencies. The market is concerned about the impact of US President Trump’s tariff hikes, but Japan is considered a relatively less affected country, making it a safe haven for funds. In addition, the increased expectations of interest rate hikes by the Bank of Japan (central bank) have also promoted yen buying.

Judging from the rise and fall of the Nikkei Currency Index (2020=100), which comprehensively shows the nominal real exchange rate of the yen relative to a wide range of currencies (as of February 6), the yen has risen the most among the major currencies known as the G10 currencies. In the foreign exchange market on February 6, the yen-dollar exchange rate once reached more than 151.5 yen per dollar, setting a level of yen appreciation and dollar depreciation for about two months since mid-December 2024. The yen hit a new high against the Australian dollar in about five months, and against the euro in about two months.

Another reason behind the yen being bought at the moment is the strengthening of expectations for the Bank of Japan to raise interest rates. Japan’s Minister of Economics, Finance and Regeneration Ryomasa Akazawa said at the House of Representatives Budget Committee on February 5: “The current understanding is that it is still in a state of inflation, which is consistent with the understanding of (Bank of Japan’s) President Kazuo Ueda.” Sony Financial Group’s chief analyst Kumiko Ishikawa analyzed that “due to the (Japanese) government’s remarks that it is aware of inflation, more and more market participants believe that the Bank of Japan’s continued interest rate hikes are the established route.”

The wage and price indicators that the Bank of Japan attaches importance to also support the market’s expectations for a quick rate hike. In the monthly labor statistics survey for December 2024 released by the Ministry of Health, Labor and Welfare of Japan on February 5, real wages excluding the impact of price fluctuations have been positive for two consecutive months. In the Japanese National Consumer Price Index (CPI) released by the Ministry of Internal Affairs and Communications in late January, the price increase rate excluding fresh food was 3.0%, the highest increase since August 2023.

Japan is in a phase of monetary tightening, while most central banks around the world are promoting monetary easing. Due to the different monetary policy directions, the yen is more likely to be bought.

For many countries, additional tariffs imposed by the United States are the cause of depreciation against the US dollar. The reason is the awareness of inflation and interest rate hikes in the United States. For example, the Canadian dollar has depreciated significantly due to additional tariffs.

Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, said: “Even if it is not the target of tariff increases, it may cause the currency to be sold due to trade relations.” The background of the depreciation of the Australian dollar is that the United States has imposed a 10% tariff on China since February 4. In Australia, which is closely linked to the Chinese economy, concerns about slowing exports to China and economic slowdown are growing.

Japan is considered a country with relatively low tariff risks. During Trump’s first term, Japan was subject to additional tariffs of 25% and 10% on steel and aluminum, respectively, but the scale was small compared to other countries.

Keiko Ninomiya, chief foreign exchange market analyst at SMBC Trust Bank, analyzed that “the safe-haven trend towards the Japanese yen, which is not clearly listed as the target of tariff increases, has strengthened.” Ueno of Mitsubishi UFJ Morgan Stanley said that considering the risk of tariffs, “the only currencies left to buy are the yen or the dollar.”

However, there are doubts about the sustainability of the yen’s appreciation. Although expectations for the Bank of Japan to raise interest rates have increased, the expectation of the pace of interest rate hikes is mainly once every six months. It is difficult to imagine a sharp narrowing of the interest rate gap between Japan and the United States. Takuya Kanda, director of the research department of Gaitame.com Research Institute, said: “The current appreciation of the yen is largely a correction of previous dollar purchases, and the possibility of further appreciation of the yen is not high.”