CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The Japanese yen dropped to a multi-month low in the second week of November 2024, after outperforming all other currencies in July. The currency has had a rollercoaster year so far. As the risks of the Japanese economy slipping to the 5th position intensify, how will the JPY perform? Will its volatility offer forex traders opportunities to trade? Here’s what you need to know.
The Japanese currency was down 9.6% year-to-date, as of November 14, 2024. The JPY/USD pair started the year at 0.0069, hitting its lowest for 2024 on July 2 at 0.0062. In the following three weeks, the yen appreciated 12% against the dollar, thanks to the Bank of Japan’s (BOJ) decision to raise interest rates by 15 basis points. The interest rate is currently at 0.25%, the highest since 2008. The rally represented strongest bull run in the JPY/USD since the 2008 financial crisis.
Although the BOJ had ended the negative rate regime in March 2024, it wasn’t enough to drive growth for the JPY. The hawkishness, combined with speculations of a rate cut by the US Federal Reserve, drove a surge in JPY/USD through Q3 2024. The Japanese Ministry of Finance’s yen purchases in April and July also played a significant role in pushing the currency higher. The unannounced cumulative interventions worth $61.55 billion gave the necessary boost to the yen. Unfortunately, or shall we say expectedly, the tiny rate hike had a short-lived impact. Trading around 0.64 on November 15, 2024, the yen is expected to head to fresh lows.
The IMF expects the Indian GDP to surpass that of Japan in 2025, revising its expectation that Japan would slide from being the fourth largest economy to the fifth largest in the world in 2026. However, headwinds from rising food prices and weakness in the Indian banking sector may prevent this prediction from materialising. The IMF also lowered its forecast for Japan’s economic growth in 2024. The organisation expects fiscal measures and the BoJ’s interest rate hikes to drive recovery in 2025. Meanwhile, the tight labour market in the country is expected to support stronger wage growth, which will help lift consumer spending.
Several factors are affecting the growth of the Japanese economy and the yen’s valuation.
The October 2024 snap elections have added to the headwinds for the JPY. The ruling LDP lost its majority and the yet-unformed coalition means more fiscal spending and piling debt. Political uncertainties weigh on currency valuation since policy instability affects trader confidence and risk appetite. BoJ Governor Kazuo Ueda’s unclear communication while the central bank plans another round of monetary tightening could also have a hand in the yen weakening.
The BOJ’s path to policy normalisation is fraught with challenges while the currency declines. Governor Ueda has ruled out a rate hike, at least for December 2024. Simultaneously, the economic resilience of the US and inflation in the EU are keeping their respective central banks from lowering interest rates further. The sustained high interest rate differential may weigh on the yen.
The incoming Trump administration is expected to bring expansionary policies, pushing inflation higher in the US. This may translate into the Fed holding interest rates steady. Steady treasury bond yields in America and Japan will keep the interest rate differential high and the JPY under pressure.
To make informed decisions, forex traders must stay updated on the most impactful economic data releases for their chosen currency pair.
GDP growth is negatively correlated with currency growth. The Japanese economy contracted by 1.1% in Q3 2024 and 0.6% in Q1 2024, compared to the expansion of 0.1% and 0.7% in Q4 2023, and Q2 2024, respectively. Continued instability in growth induces volatility in the currency, creating opportunities for forex traders to explore.
Starting 2024 with a deficit of ¥17,700 billion, Japan’s trade balance has remained in the red each month, except March and June. Shrinking exports, due to production insufficiencies, are a major threat to the economy’s position as the 4th largest in the world. These catalyse the weakening of the currency. Notice here that the June trade surplus, followed by the interest rate hike, could also have played a role in the July surge in the JPY.
The Japanese Manufacturing PMI registered its 4th consecutive month of contraction in September 2024. Orders fell for the seventeenth month, exerting downward pressure on the economy. The shrinking manufacturing output for an export-dependent economy means lower foreign inflows. This weighs on the domestic currency.
A volatile year, surprise elections and a threat to Japan’s status as the world’s 4th largest economy are set to keep the JPY volatile through Q4 2024 and Q1 2025.
Nicknamed the Ninja, the USD/JPY is usually traded based on the following data (in addition to above economic releases):
The EUR/JPY is the most traded pair involving the Japanese yen. Experienced forex traders observe the following data for this pair:
Other popular pairs for forex traders to gain exposure to yen include the CAD/JPY, GBP/JPY, AUD/JPY and NZD/JPY.
Disclaimer:
All data, information and materials are published and provided “as is” solely for informational purposes only, and is not intended nor should be considered, in any way, as investment advice, recommendations, and/or suggestions for performing any actions with financial instruments. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation or needs, and hence does not constitute as an advice or a recommendation with respect to any investment product. All investors should seek advice from certified financial advisors based on their unique situation before making any investment decisions in accordance to their personal risk appetite. Blackwell Global endeavours to ensure that the information provided is complete and correct, but make no representation as to the actuality, accuracy or completeness of the information. Information, data and opinions may change without notice and Blackwell Global is not obliged to update on the changes. The opinions and views expressed are solely those of the authors and analysts and do not necessarily represent that of Blackwell Global or its management, shareholders, and affiliates. Any projections or views of the market provided may not prove to be accurate. Past performance is not necessarily an indicative of future performance. Blackwell Global assumes no liability for any loss arising directly or indirectly from use of or reliance on such information here in contained. Reproduction of this information, in whole or in part, is not permitted.