Japanese Yen Faces Short-Term Hurdles but Poised for Strength by Year-End

The Japanese yen's recent rally may hit temporary resistance, but analysts at Capital Economics (CE) expect it to strengthen against the U.S. dollar by year-end.

Despite strong wage growth agreements in Japan’s “Shunto” spring wage talks, the yen showed little reaction. CE analysts noted this was expected, as higher wage pressures and anticipated Bank of Japan (BOJ) rate hikes had already been factored into the market.

The yen has appreciated this year due to shifting yield dynamics. However, analysts caution that concerns over a slowing U.S. economy, which have bolstered the yen, might be overstated. Additionally, speculative bets on the yen are at their highest level since 2016, increasing the risk of a pullback if market sentiment changes.

CE remains confident that the BOJ will continue policy normalization, forecasting Japan’s 10-year government bond yield to hit 1.75% by the end of 2025. The firm projects the USD/JPY exchange rate, currently around 149, to decline to 145 by year-end and further to 140 by the end of 2026.

While short-term headwinds persist, the yen’s long-term outlook remains bullish as Japan’s monetary policy evolves.