Why the Japanese Yen Could Be the Most Interesting Currency in 2024

The Japanese yen is one of the most traded currencies in the world, behind the US dollar and the euro. It is also widely used as a reserve currency by many countries and institutions. But what makes the yen so interesting for the upcoming year 2024? Here are some factors that could influence the performance and outlook of the yen in the next 12 months.

In October 2023, Japan held its general election, which resulted in a landslide victory for the ruling Liberal Democratic Party (LDP) and its coalition partner, Komeito. The LDP secured a two-thirds majority in the lower house of parliament, giving it the power to amend the constitution and pursue its agenda. The LDP’s leader, Prime Minister Yoshihide Suga, pledged to continue the economic policies of his predecessor, Shinzo Abe, known as Abenomics. These policies include aggressive monetary easing, fiscal stimulus, and structural reforms to boost growth and inflation.

Why the Japanese Yen Could Be the Most Interesting Currency in 2024
Why the Japanese Yen Could Be the Most Interesting Currency in 2024

The market reaction to the election outcome was positive, as it signaled political stability and policy continuity for Japan. The yen strengthened against the dollar, reaching a three-month high of 108.57 on October 31, 2023. Investors expected the LDP to maintain its supportive stance for the Bank of Japan (BOJ), which has kept interest rates at record lows and expanded its asset purchases to combat deflation and support the economy amid the COVID-19 pandemic.

However, some analysts also warned that the strong mandate for the LDP could pose some challenges for the yen in the future. For instance, the LDP could face more pressure to revise the pacifist constitution and increase defense spending, which could strain Japan’s relations with its neighbors, especially China and South Korea. Moreover, the LDP could face more scrutiny from the public and the media over its handling of the pandemic, the Olympic Games, and the nuclear disaster in Fukushima. These issues could erode the LDP’s popularity and credibility, and create political uncertainty and social unrest in Japan.

The Outlook for the Global Economy and Trade

Another factor that could affect the yen in 2024 is the outlook for the global economy and trade. Japan is a major exporter of goods and services, and its economy is highly dependent on external demand. Therefore, the yen is sensitive to the fluctuations and trends in the world markets.

In 2023, the global economy showed signs of recovery from the pandemic-induced recession, thanks to the widespread vaccination campaigns, the easing of lockdown measures, and the fiscal and monetary stimulus from major economies. According to the International Monetary Fund (IMF), the global economy grew by 5.9% in 2023, up from -3.1% in 2020. The IMF also projected a 4.9% growth for 2024, with advanced economies growing by 3.8% and emerging markets and developing economies growing by 6.0%.

However, the global recovery also faced some headwinds and risks, such as the emergence of new variants of the coronavirus, the uneven distribution of vaccines, the rising inflation and supply chain disruptions, the geopolitical tensions and trade disputes, and the environmental and social challenges. These factors could dampen the global growth momentum and create volatility and uncertainty in the markets.

The yen, as a safe-haven currency, tends to appreciate when the global risk sentiment is low and investors seek refuge in more stable and liquid assets. Conversely, the yen tends to depreciate when the global risk sentiment is high and investors seek higher returns in more risky and emerging assets. Therefore, the direction and magnitude of the yen’s movement in 2024 will depend largely on how the global economy and trade will evolve and cope with the potential shocks and surprises.

The Prospects for the Bank of Japan’s Policy

The third factor that could influence the yen in 2024 is the prospects for the Bank of Japan’s policy. The BOJ is the central bank of Japan, and it is responsible for conducting monetary policy and maintaining price stability and financial stability in the country. The BOJ has been pursuing an ultra-loose monetary policy since 2013, as part of the Abenomics framework. The BOJ’s policy toolkit includes a negative interest rate of -0.1%, a yield curve control (YCC) program that targets a 10-year government bond yield of around 0%, and a massive quantitative and qualitative easing (QQE) program that involves buying various assets, such as government bonds, corporate bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs).

The BOJ’s policy stance has been largely unchanged in 2023, despite the improving economic conditions and the rising inflation pressures. The BOJ maintained its policy settings at its monetary policy meetings throughout the year, and reiterated its commitment to achieving its 2% inflation target as soon as possible. The BOJ also expressed its readiness to take additional easing measures if necessary, to support the economy and prevent the yen from appreciating too much.

However, some market participants and observers have speculated that the BOJ could start to taper or normalize its policy in 2024, in line with the other major central banks, such as the US Federal Reserve, the European Central Bank, and the Bank of England. These central banks have already signaled or initiated their plans to reduce or withdraw their stimulus measures, as their economies recover and their inflation rates exceed their targets. The BOJ could face more pressure to follow suit, especially if the Japanese economy continues to grow and the inflation rate approaches or exceeds the 2% target.

The BOJ’s policy outlook for 2024 will have a significant impact on the yen, as the monetary policy divergence between Japan and other countries affects the interest rate differential and the capital flows. If the BOJ maintains its policy stance or eases further, the yen could weaken against the currencies of the countries that tighten their policy or raise their interest rates. If the BOJ tapers or normalizes its policy, the yen could strengthen against the currencies of the countries that maintain or ease their policy or lower their interest rates.

The Japanese yen is an early contender for the most interesting major currency in 2024, as it faces various factors that could shape its performance and outlook. The yen could be influenced by the impact of the 2023 general election, the outlook for the global economy and trade, and the prospects for the Bank of Japan’s policy. The yen could appreciate or depreciate depending on how these factors interact and evolve in the next 12 months. Therefore, investors and traders should pay close attention to the developments and trends in Japan and the world, and be prepared for the potential opportunities and challenges that the yen could offer.

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