The Japanese yen has gained strength recently, boosted by falling U.S. Treasury yields. Analysts at Capital Economics predict the currency will continue to appreciate modestly through 2025.
By 10:20 ET (15:20 GMT) on January 16, the USD/JPY pair had dropped 0.4%, trading at ¥155.74, just above its weakest point since December 19. The yen’s rise follows a decline in U.S. Treasury yields after the latest U.S. Consumer Price Index (CPI) report. Capital Economics highlighted that this drop has eased pressure on the yen, which had lagged behind Japanese Government Bond (JGB) yields.
Hawkish statements from Bank of Japan (BOJ) officials, including Governor Kazuo Ueda, and rumors of a potential interest rate hike next week have also supported the yen’s recent rally. However, despite these tailwinds, the yen remains relatively weak against the U.S. dollar, sparking speculation about the extent of any further gains.
Capital Economics tempers expectations for a major rally, pointing to fewer supportive factors compared to mid-2024. The firm noted that U.S. Treasury yields, while expected to decline slightly, are unlikely to see a significant drop. With the Federal Reserve nearing the end of its rate-cut cycle, only 50 basis points of further reductions are expected, 40 of which are already priced in. This leaves limited room for the yen to gain much ground.
Additionally, the yen’s broader valuation, including its real effective exchange rate, remains below historical norms, signaling limited upside potential. Still, the possibility of a hawkish surprise from the BOJ could boost the currency further. Capital Economics predicts the yen will strengthen moderately, setting a year-end 2025 target of ¥145.
The firm concludes that while the yen is likely to appreciate, gains will be more measured compared to the sharper rally seen in 2024.
