Market News

By Mia Glass and Daisuke Sakai

(Bloomberg) -- Traders are trimming their bets on a yen rally after policy meetings from the Federal Reserve and Bank of Japan cast doubts on how quickly the rate differentials between the US and Japan may narrow. 

Prior to the back-to-back meetings last week, strategists were betting that 2025 would be the year for the yen. But the market is now feeling less optimistic on the yen’s outlook after BOJ Governor Kazuo Ueda opened up the possibility of waiting longer for the next hike, while the Fed signaled a slowdown in the pace of monetary easing next year.

Options metrics suggest that traders were the least bullish on the yen in a month after the meetings. Leveraged funds also raised their net short position on the yen to some 44,926 contracts, the most since July just before macro volatility roiled global currency markets, according to the latest Commodity Futures Trading Commission data for the week ended Dec. 17.

READ: Yen Slides More Than 1% to Weakest Since July on Ueda Comments

Strategists at Mizuho Securities Co. and Mitsui Sumitomo Insurance Co. are among those who recently raised their dollar-yen forecasts. Mizuho lifted its dollar-yen prediction for end-2025 to around 145 from 130, while Mitsui Sumitomo Insurance now sees 140 compared with its initial forecast of 130. 

“We changed our outlook because of the extremely hawkish Fed and the extremely dovish Bank of Japan,” said Tsukasa Sugiura, a market strategist at Mitsui Sumitomo Insurance. “The chance of a BOJ hike in January seems less likely now.”

The Japanese currency fell to 157.93 on Friday, its lowest level since July, after Governor Kazuo Ueda said at a post-decision news conference on Thursday that he needs more information on Japan’s wages and Donald Trump’s policies. Currency strategists have pointed to a dangerous scenario of more yen weakness if the BOJ stands pat on interest rates until March or later. Some say that the wide gaps in interest rates could also bring back the yen carry trade, where investors borrow in Japan and deploy the funds in higher yielding markets, a popular strategy that blew up global markets this year.

READ: Yen Carry Trade That Rattled Markets Shows Signs of a Comeback

“The Fed’s hawkish tilt and BOJ’s pause could bring fresh reasons for yen traders to ‘carry’ on,” said Charu Chanana, chief investment strategist at Saxo Markets. “The narrowing of the yield gap, both from the Fed and the BOJ side, have been pushed beyond Q1,” so yen appreciation may also be pushed back to the second half of the year, she says.

The yen was down 0.1% to 156.42 against the dollar at 11:48a.m. in Tokyo. 

Mizuho’s previous forecast for the yen had expected it to reach a level not seen since early 2023 due to a narrowing policy rate gap and 10-year yield differential between the US and Japan next year. But after seeing the Fed’s updated monetary policy expectations, which implied only two quarter-percentage-point-cuts next year, Mizuho immediately changed its dollar-yen prediction.

“For the time being, the dollar is likely to remain strong against the backdrop of the relative strength of the US economy and the high level of interest rates, so we have revised our dollar forecast upwards,” wrote Mizuho strategists Masafumi Yamamoto and Masayoshi Mihara in a note.

In the near term, strategists warn that the yen may reach 160 against the dollar, a level that raises the risk of intervention or may even bring an earlier hike by the BOJ. Japan’s Finance Minister Katsunobu Kato and currency chief Atsushi Mimura both warned last Friday that they’ll take appropriate action against excessive moves. 

“We believe that it’s more likely that the BOJ will wait until March for an additional hike,” wrote Nomura analysts Kyohei Morita and Yujiro Goto in a report, revising their earlier call for a January hike. “In the short term, there are higher risks of an overshoot in JPY depreciation, but we focus on any verbal intervention and the possibility of a hawkish shift in the BOJ,” with Ueda set to give a speech on Wednesday.

--With assistance from George Lei and Carter Johnson.

(Updates with latest yen level. A previous version corrected direction of forecast change in fourth paragraph.)