April 29, 2016

The Japanese yen (JPY) has been appreciating strongly against the U.S. dollar since the start of the year. Heightened volatility in financial markets worldwide and concerns about the health of the global economy drove capital to safe-haven assets such as the yen. On 11 April, the JPY marked the strongest reading in over one-and-a-half years; it traded at JPY 107.9 per USD. This was 5.2% stronger than the level observed on the same day in March. On an annual basis, the Japanese yen gained 10.2% against the U.S. dollar. On the following days, the yen weakened slightly amid expectations that the Central Bank might pull the trigger on its bazooka again.



While the recent rally of the yen is mostly the result of rising aversion to global risk, it also jeopardizes authorities’ yearlong stimulus program dubbed Abenomics. One of Prime Minister Shinzo Abe’s key policies was to weaken the yen to boost the country’s all-important external sector. If sustained, the appreciation of the yen could drive exports to fall, translating into a deterioration in businesses’ earnings, which, in turn, would lead to a reduction in employment and investment.



Although the Bank of Japan refrained from expanding its already-massive monetary stimulus at its 28 April meeting, a strong yen will certainly add to other troubling economic indicators and this means that it is only a matter of time before it undertakes further easing.

FocusEconomics Consensus Forecast panelists expect the yen to trade at 117.7 per USD by the end of this year. For 2017, the panel projects that the yen will weaken to 119.4 per USD.