Financial institutions in Japan and other countries are reviewing their expectations for the yen’s exchange rate against the dollar. This is due to lower expectations of interest rate hikes by the Bank of Japan and a potential expansion in spending by new Japanese Prime Minister Sanae Takaishi.
In October, the yen fell by more than 7 yen, or 4%, against the dollar – a much greater rate than many other currencies. The price of the dollar this month reached 154 yen, the lowest price in nine months.
JPMorgan Chase, in its October 31 report, revised its forecast for the yen to 156 to the dollar at the end of this year, from the previous forecast of 142. The bank also revised its forecast for the end of March 2026 to 152, from 139. On the same day, MUFG Bank and Sumitomo Mitsui Banking Corporation also changed their forecasts downward.
The Bank of Japan (the central bank), at its last monetary policy meeting, kept interest rates unchanged. President Kazuo Ueda, at a press conference, said he did not have a pre-determined position on the decision to raise interest rates and that he “would like to collect more data and monitor the initial momentum” in the wage negotiations. This caution has led to the selling of the yen and its subsequent depreciation.
Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking, believes there is no basis to prepare for an early rate hike. “This is not the time to preemptively buy the yen,” he said.
Last Friday, the chances of the Bank of Japan raising interest rates at its December policy meeting were 57%, according to calculations based on overnight index swap market interest rates. It is believed that the expected increase in interest rates has not yet become the main scenario for most investors.
Another factor leading to the yen’s decline is investor concern about Japan’s expanding budget – although the Takaishi government describes this as “responsible and proactive fiscal policies.”
The new Prime Minister intends to develop a stimulus plan to combat inflation by the end of November and to ask Parliament to approve the supplementary stimulus budget during the current session.
Some expect that the size of the supplementary budget will exceed the size of the previous year. “Concerns about Takaishi’s pre-emptive spending cannot be dispelled until we see the exact size of the supplementary budget, and even then, the pressure is likely to shift towards selling the yen,” said Teppei Inoue, head of global markets research at MUFG Bank in Tokyo.
About The Author
