The Japanese yen has strengthened recently, but near-term challenges could slow further gains, according to analysts at Capital Economics. However, they expect the yen to appreciate against the U.S. dollar by the end of the year.
Despite positive results from Japan’s annual “Shunto” wage negotiations—where businesses agreed to significant pay increases—the yen showed little reaction. Analysts noted that markets had already factored in higher wages and the likelihood of Bank of Japan (BOJ) rate hikes.
The yen’s rise this year has largely been driven by shifting yield differentials, but analysts warned that concerns over a slowing U.S. economy—another factor supporting the yen—might be overstated. Additionally, speculative bets on the yen have reached their highest level since 2016, increasing the risk of a short-term pullback if investor sentiment changes.
Capital Economics still expects the BOJ to proceed with normalizing its monetary policy, pushing Japan’s 10-year government bond yield to 1.75% by the end of 2025. They forecast the USD/JPY exchange rate to fall to 145 by the end of this year and further strengthen to 140 per dollar by the end of 2026.
