Bank of Japan applies the brakes, but the government hits the accelerator… Will the yen fall again this year?

Prolonged yen weakness since 2021

Despite the Bank of Japan's interest rate increases

Government 'money printing' offsets the effect

U.S. interest rate policy is a variable this year

As of the end of last year, the yen rose against the dollar for the first time in five years. As confidence in the dollar fell, the yen relatively strengthened. However, the yen is weak against currencies other than the dollar. Analysts judge that a shift to yen appreciation is still far off. This year, in addition to a rate increase in Japan, how much the U.S. cuts its policy rate will largely determine the yen–dollar exchange rate.

According to the Nikkei on the 1st, as of 5 p.m. on the 30th of last month, the yen–dollar rate stood at 155 yen 97 sen per dollar. Compared with 157 yen 89 sen per dollar at the same time a year earlier, it moved about 2 yen toward yen appreciation. It is the first year-on-year year-end appreciation since 2020, when 'risk-averse' yen appreciation occurred amid the spread of COVID-19.

Last year saw simultaneous dollar weakness and yen weakness. When U.S. President Donald Trump announced reciprocal tariffs in April last year, the market responded by selling the dollar. On April 22 last year, the yen–dollar rate hit an intrayear low of around 139 yen per dollar. The yen therefore rose against the dollar.

President Trump also publicly urged Jerome Powell, chair of the U.S. central bank (the Fed), to cut interest rates. Concerns about the independence of the central bank grew, shaking confidence in the dollar. Many advanced-country currencies, including the euro and the British pound, rose against the dollar.

The yen rose against the dollar as well, but it lagged within the G10, the group of the world's ten most traded currencies. The yen fell against other currencies excluding the dollar, recording a low of 184 yen per euro in December last year. The yen also plunged against the Swiss franc, hitting a low not seen since 1982. This suggests that the weak-yen phase that began in 2021 has not ended.

The Bank of Japan raised its benchmark interest rate by a total of 0.5% point last year, and the 10-year government bond yield, an indicator of long-term interest rates, exceeded 2% and rose to its highest level in 27 years. Bond prices fell. The U.S.-Japan long-term interest rate gap narrowed from about 3.5% points at the end of 2024 to around 2% points.

Nevertheless, it has not shifted to yen appreciation because many expect that active fiscal measures by the Sanae Takaichi administration will offset the effects of the Bank of Japan's rate hikes. Compared with around 147 yen per dollar before Takaichi's election as prime minister last year, the rate has moved about 9 yen in the direction of yen depreciation.

While the Bank of Japan is applying the brakes, experts point out that if the government steps on the fiscal accelerator, inflation could run high. As a result, some predict the rate will fall again to 160 yen per dollar by December this year.

The Bank of Japan's interest rates are likely to remain at accommodative levels below the 2% inflation target for the time being. Accordingly, there is considerable view that whether the yen rises against the dollar this year will depend on U.S. interest rate policy. There are forecasts that if the U.S. does not cut rates further, the yen will fall further.

The main opinions from the Bank of Japan's December monetary policy meeting, released last month, are variables. One opinion said that Japan's interest rates are 'by far the lowest in the world' on a real basis considering inflation. It has been suggested that if U.S. rate cuts are followed by an early rise in Japan's rates, rapid yen appreciation could occur.

Tokyo=Il-gyu Kim, correspondent black0419@hankyung.com