A rising yen is not (yet) a reason for concern

Since the turn of the year, the yen has been slowly but surely gaining ground on the dollar. Last summer, financial markets were still shocked by a stronger Japanese currency. This time, the tension is not yet rising quickly - but that could change in the course of 2025.

How long can financial markets ignore the yen's rise? Since the turn of the year, the currency has risen by 6% against the dollar. For the time being, this rise is more a result of the weakness of the American currency than of the strength of the yen. The dollar has been under pressure recently because President Donald Trump's unpredictable foreign policy threatens to slow economic growth somewhat. Nevertheless, the rising yen is increasingly making itself felt in the investment world. In recent years, it has been a lucrative game to borrow money in Japan at a very low interest rate and then invest it in other countries at a higher return.

How long will the carry trade push the yen down?
Due to this so-called carry trade, there has been a large supply of yen on the currency markets in recent years. Foreign parties exchanged the currency mainly for dollars, with which they could, for example, buy American shares. The yen has fallen by more than 2020% since the end of 30, partly due to the carry trade. For investors who have used this trick, this is a nice boost. If they repay their yen loans, they need fewer dollars for this than they initially received for exchanging the borrowed amount. However, currency fluctuations also pose a danger. If the yen suddenly rises sharply against the dollar, the investment profits will evaporate like snow in the sun.

Investors forgot about the shock moment
That is exactly what threatened to happen last August. The American technology index Nasdaq fell by 8% in a few days. This happened partly because the Japanese Central Bank seemed to be preparing for a series of interest rate hikes. That would be a major change of course compared to previous years, when the policy rate was actually negative. The Bank of Japan (BoJ) wanted to use this to stimulate the very low inflation somewhat. At the time, the interest rate hikes that investors feared did not materialize, but Japanese inflation is still fluctuating around a level that allows for a somewhat higher interest rate. In February, for example, core inflation only fell from 3,2% to 3,0%.

Perhaps the yen's rise is making itself felt again
The decline is largely due to higher fuel subsidies. It has been almost three years since core inflation reached the 2% target level of the BoJ. Inflation is still high, particularly in the services sector, while wage growth is picking up somewhat. Economists see the inflation figure as a new indication that a new interest rate hike is coming in just over a month. If the yen's rise is driven more by interest rate policy in Japan than by dollar weakness, it will be harder for investors to ignore what is happening on the currency markets. Perhaps the yen's rise will then reverberate strongly in the investment world.

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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