Prolonged Weakness of Japanese Yen Anticipated

TOKYO – Goldman Sachs has projected that the Japanese Yen will likely maintain its weakened state against the dollar for an extended period, with expectations set for the currency to remain at or above 150 to the dollar over the next year.

This forecast comes amidst a backdrop of a resilient U.S. economy and delayed prospects of rate cuts by the U.S. Federal Reserve, which have contributed to the Yen’s depreciation since the beginning of the year. In late April, the Yen reached a level not seen since 1990, hitting 157.8 to the dollar, prompting Japan’s finance ministry to intervene in the foreign exchange markets, selling dollars in an attempt to bolster the Yen.

The underlying reasons for the Yen’s weakness are multifaceted. Primarily, the macroeconomic environment has exerted significant pressure on the currency. The Yen typically appreciates when recession risks are high, and yields are lower. However, the current economic climate has seen surprisingly resilient growth, particularly in the U.S., which has persisted despite high Federal Reserve rates. This growth, tracking at around 3% despite high yields, is a stark contrast to the recession risks and has been a contributing factor to the Yen’s decline.

Additionally, the Bank of Japan’s (BOJ) monetary policy has played a role. After its meeting in April, the BOJ signaled that it does not react directly to FX markets and that its primary policy target is sustainable inflation. The BOJ’s stance indicates that the Dollar-Yen rate is only a concern when currency fluctuations impact the achievement of their inflation target.

Japanese individuals investing in foreign securities have also influenced the Yen’s trajectory. With Yen yields having risen but remaining low compared to other markets, especially the U.S., it has been more attractive for Japan-based investors to invest abroad, creating a net outflow to other markets.

In response to these challenges, Japan has been implementing measures to stabilize its economy. The government has been focusing on broadening and accelerating the country’s digital transformation to spur productivity growth and reinforce public finances. This includes investing in technology, education, and professional training, as well as improving public spending efficiency by digitalizing more government services. Additionally, efforts are being made to boost labor force participation and productivity, which are crucial for upholding growth and living standards over the long term.

The Japanese economy is also looking toward possible post-COVID growth, with real GDP in April–June 2023 finally surpassing its peak before the pandemic. However, domestic private demand remains below its pre-COVID-19 high, indicating that there is still a way to go before a full recovery is realized.

In conclusion, while the Japanese Yen faces continued weakness, Japan’s strategic economic measures aim to create a resilient and stable economic environment. Goldman Sachs’ analysis serves as a critical indicator for investors and policymakers alike, as Japan navigates through these economic challenges. (zai)