Just three months ago, many in the analyst community expected that 2024 would mark an inflection point for the yen after three years of the currency falling against the dollar. The consensus forecast was for the yen to appreciate from ￥141 against the US currency at the end of 2023 to ￥135 a year later, according to Bloomberg data.Instead, however, the yen has fallen further, flirting with levels near ￥152. Among the largest developed-market currencies, the yen has lost the most against the dollar so far this year, weakening nearly 7 per cent.
So what went wrong with the forecasts? Some yen support was expected from structural factors including a significant current-account surplus and attractive valuations (the yen is near record lows against a trade-weighted basket of currencies).
However, the catalyst in focus was Japanese monetary policy. Specifically, the potential for Japanese reflation to warrant higher interest rates for the first time since 2007 was seen as a key source of yen strength. Currencies tend to be heavily influenced by the relative attractiveness of their interest rates.