After two years of betting on a yen rebound only to be met with further losses, some strategists believe the third try will pay off for the embattled currency.

Some believe that a likely series of rate hikes by the Bank of Japan and further rate cuts by the Federal Reserve will push the yen back to around 130 against the dollar. These forecasts are highly cautious given the volatility of the yen in 2024 and the difficulty in predicting what impact Trump may have on Fed policy and global markets.

A stronger yen will have a knock-on effect across asset classes, weighing on Japanese stocks while increasing the ability of cash-rich Japanese companies to make acquisitions overseas. Money will also be more willing to flow back to Japan.

“The dot plot shows that the Fed is expected to continue cutting rates, while the Bank of Japan is expected to raise rates every six months or so, which will lead to a narrowing of the interest rate differential between the U.S. and Japan,” Masafumi Yamamoto and Masayoshi Miharaa, strategists at Mizuho Securities, said in a note last week. “Not all of Trump’s policies will lead to a stronger dollar.”

Mizuho strategists predict the yen will surge to 130 per dollar by the end of 2025 - a level not seen since early 2023. Nomura Securities Co. and Saxo Markets expect the yen to rise to 140.

“We see upside risks to USD/JPY in the near term, but we expect the yen to strengthen in 2025,” said Yujiro Goto, head of FX strategy at Nomura Securities Inc. “Even under Trump, the Fed and other major central banks are still cutting rates.” He added that tariff concerns should support the yen’s value relative to other currencies.

Traders see a more than 80 percent chance of a Fed rate cut by January, providing some relief for the yen's potential losses.

Nomura's Goto also noted that intervention risks and verbal warnings from Japanese authorities could limit downside risks for the yen against the dollar. Japan's chief monetary official, Atsushi Mimura, warned that the government would take appropriate action against any excessive foreign exchange moves following the yen's slide sparked by Trump's election this month.

Analysts said that while the dollar's gains against the yen are expected to slow somewhat, it will not be a one-sided trade. Uncertainty about the pace of the Federal Reserve's rate cuts and Trump's tariffs could create significant obstacles to a stronger yen.

While the Bank of Japan has said it remains on track for gradual rate hikes, any weakening in expectations for a Fed rate cut will weigh on the yen. Fed Chairman Jerome Powell said last week that recent economic signals mean the Federal Open Market Committee doesn’t have to rush to cut rates.

“The possibility left on the table by the Fed is that the U.S. economy could run hotter than expected, or in any case, inflation could be higher than expected, in which case the rate cuts previously priced into the yield curve will be unwound,” said Naomi Fink, chief global strategist at Nikko Asset Management. “That means interest rate differentials will persist, which also means that demand for the dollar relative to the yen in a risk-on environment will remain.”

In addition, Japan's capital outflows have exceeded its current account surplus, which has put pressure on the yen. Mitsubishi UFJ Morgan Stanley's forecast for the yen against the dollar at the end of 2025 is 154.50, due to these risks.

Although the Bank of Japan gave no clear hints about next month’s action in the summary of its October policy meeting, pressure is building for another rate hike. For the currency pair, the real catalyst could be clearer signs of another rate cut in the US.

Later on Monday, Bank of Japan Governor Kazuo Ueda is scheduled to give a speech that traders will scrutinize for any clues about the policy outlook and his views on the direction of the yen.

Charu Chanana, chief investment strategist at Saxo Markets in Singapore, said:

"(If) a further slowdown in the U.S. economy prompts the Fed to cut interest rates, that could be a potential reason for the yen to rise to the 140 range."

Article forwarded from: Jinshi Data