Yen Set to Recover in 2025 as Fed's Easing Cycle Impact Wanes, According to Capital Economics
Capital Economics shared its views on the performance of the Japanese yen against the US dollar on Thursday, forecasting that the yen will have a stronger year in 2025. This analysis follows a period of pressure on the yen due to the policies of the US Federal Reserve (Fed) and the Bank of Japan (BoJ). Despite the Fed's interest rate cuts this year and the BoJ's interest rate hikes, the yen depreciated by approximately 10% against the dollar in 2024.
The Fed's recent hawkish stance, predicting only a 50 basis point easing in 2025, along with the BoJ's decision to halt its tightening cycle, contributed to the yen's depreciation. This divergence in monetary policy was highlighted by Fed Chair Powell's cautious tone and the BoJ's reluctance for further interest rate hikes. Consequently, there was an increase in US Treasury yields and a corresponding decline in the yen’s value.
Capital Economics notes that long-term Treasury yields have posed a continuing challenge for the yen throughout the Fed's easing cycle, even in the face of more optimistic short-term expectations, as observed on Monday. The yield on the 10-year US Treasury bond is expected to finish the easing cycle at a higher level than when it began, a rare but unprecedented situation.
The analysis also mentions that despite the BoJ's interest rate hikes, the yield on the 10-year Japanese Government Bond (JGB) has struggled to reach the same level as Treasury yields, leading to challenges for the yen against the dollar. Factors such as the expectation of Trump's election and potential tariffs and fiscal stimulus next year have influenced Treasury markets.
Looking towards 2025, Capital Economics envisions a more favorable monetary policy environment for the yen. While the Fed is likely to remain cautious regarding further rate cuts, sufficient easing is anticipated to keep long-term yields at their current levels. On the other hand, under President Ueda’s data-driven approach, the BoJ may find a stronger impetus towards policy normalization than investors currently expect, which could raise long-term yields and strengthen the yen. Capital Economics predicts that the yen will reach 145/$ by the end of 2025.