Why is the yen so weak?

Why is the yen so weak？

The JPY's decline can be attributed to a number of factors. One, the yen has been depreciated because the Bank of Japan (BoJ) has maintained its dovish stance. Two, the JPY has been affected positively by the strong performance of the Nikkei, the Japanese stock market. Three, the JPY's weakness has been influenced by China's moderate economic recovery, which has centered on services and consumption rather than investment. In addition, investors now have a brighter outlook as fears about US regional banking have subsided. The JPY's decline has been exacerbated by investors' upbeat projections for the debt ceiling talks in the United States. One final factor weakening the JPY is the US economy's resilience in the face of Federal Reserve rate hikes.

Consistent dovishness from the Bank of Japan (BoJ) and the resilience of the Nikkei are seen as long-term headwinds for the JPY. A moderate economic recovery in China will also have an impact on the JPY's performance. As seen in December when the BoJ surprised the market, investors will continue to speculate on potential downside for USD/JPY during BoJ meetings, despite my expectation that the BoJ will maintain its dovish approach and refrain from making further adjustments to its Yield Curve Control (YCC) in 2023. For this reason, further appreciation of the USD/JPY exchange rate is unlikely.

As the Fed Funds rate peaks and a recession sets in for the US economy, the USD/JPY will come under selling pressure. There is little room for the JPY to fall due to this weakness, as the market has already priced in my expectation that the US debt ceiling issue will be resolved. However, the JPY could be significantly affected if US lawmakers bring the government to the verge of default and then reach a last-minute agreement to raise the debt ceiling. Furthermore, the persistently high US interest rates pose a risk of further troubles for regional banks, which may lead to a renewed demand for the JPY as a safe-haven currency.

However, the JPY's weakness in the second quarter has caught us by surprise. As a result, I am raising both of my USD/JPY projections: from 122 for the end of 2023 to 128 for the end of Q2 2019.