Only this coin keeps up with the dollar

The United States is not the only country whose currency is rallying after recent elections. The Japanese yen is benefiting from the prospect of a slightly looser fiscal policy than initially anticipated by the new administration. The currency could become one of the currency surprises of 2025.

Since Donald Trump's election victory, the dollar has been stealing the show in the currency world. The currency is gaining ground on the prospect of rapid economic growth in the United States and thanks to its role as a safe haven in uncertain times. The dollar is gaining ground on the euro, renminbi, the pound and many other currencies. The Japanese yen is a notable exception. As in the United States, the strength of this currency is the result of a close election battle. A month ago, the Liberal Democratic Party (LDP) lost its majority in the Japanese parliament for the first time in fifteen years. Even with trusted coalition partner Komeito, the party is twelve seats short of determining economic policy on its own.

Stoking the economic fire
Although the Japanese fiscal year does not start until the end of March, the new political balance is already making itself felt. Under pressure from the Democratic People's Party (DPP), Prime Minister Shigeru Ishiba is setting up a package of measures worth the equivalent of €135 billion to give the economy a boost. It is expected that the population will be partly compensated for higher electricity and fuel prices. In addition, the threshold for the lowest tax rate will be raised slightly and low-income households will have some money deposited into their accounts. The measures indicate that the new government's financial policy is a lot less conservative than financial markets had anticipated.

Interest rate gap narrows
For the yen, the fiscal stimulus is particularly important in opening the door a little wider for the Bank of Japan (BOJ) to raise the policy rate more quickly. Since mid-March, this rate has been cautiously increased from -0,1% to 0,25%. A large number of economists now expect the BOJ to add another 18 percentage point at the policy meeting on 0,25 December, after which one or two more interest rate increases could follow in 2025. The Japanese policy rate is thus taking a very different direction than that of the United States. According to data tool Fedwatch, traders expect the Federal Reserve to cut the key rate by 0,5 to 1 percentage point in the period until the end of next year.

Wrong leg
If that actually happens, there will soon be a difference of 3 percentage points between the Japanese and American policy rates. At the beginning of this year, that interest rate gap was still almost 6 percentage points. This means that it will be more difficult for investors to borrow money in Japan and put it to work in other countries at a higher return. Of course, it is not a foregone conclusion that the yen will gain ground in 2025. It would not be the first time that the currency world has been misled by the BOJ. Moreover, it cannot be ruled out that the currency will suffer some damage if Trump unleashes a trade war with China. But for the time being, there is room for the yen to climb out of the valley a bit further.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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