"Next Year US Interest Rate Peak Amid Expectations of Increase in Japan"

Bloomberg Intelligence Report

Japanese yen and US dollar banknotes. Photo by Yonhap News

[Asia Economy Reporter Moon Hyewon] There is a forecast that the yen may strengthen next year, with the yen-dollar exchange rate falling to the 125-130 yen range.

On the 25th, Audrey Child-Freeman, Chief Strategist at Bloomberg Intelligence (BI), an economic research institute under Bloomberg, stated, "The timing for the yen-dollar exchange rate to drop to 125 yen could come sooner than initially expected," adding, "There is a possibility of reaching 125 yen in the first half of next year."

She also mentioned that the next support level for the yen-dollar exchange rate in the medium term could be around 122.14 yen.

The Bank of Japan (BOJ), Japan's central bank, has been conducting monetary easing by purchasing government bonds without limit to keep the 10-year government bond yield below 0.25%, but recently surprised the market by raising the 10-year yield cap to 0.5%, double the previous limit.

The market interpreted this as an attempt to exit the ultra-low interest rate policy and effectively a rate hike, causing the yen-dollar exchange rate, which was above 137 yen before the policy revision, to plunge temporarily to 130.65 yen after the announcement, and then continue trading around 132 yen.

Chief Strategist Child-Freeman focused on the fact that this year, due to inflation not seen in over 40 years, the US benchmark interest rate was rapidly raised from 0.25% to 4.5% annually, and there is a possibility it will peak in the first half of next year.

According to the dot plot showing the Federal Reserve (Fed) officials' future benchmark rate outlook, the benchmark rate may be raised by about 0.75 percentage points more in the first half of next year before reaching its peak.

Meanwhile, Japan, which has maintained an ultra-low interest rate policy, has now started moving toward 'normalization' of rates, and the market is mentioning the possibility that after Governor Haruhiko Kuroda, who implemented Abenomics, retires in April next year, the BOJ may raise the short-term interest rate currently at minus (-0.1%).

Chief Strategist Child-Freeman explained that the growth rate outlooks for both countries next year are also factors supporting yen strength.

According to the OECD's announcement last month, this year's GDP growth rate is expected to be higher in the US (1.8%) than in Japan (1.6%), but next year, amid concerns of a US recession, Japan (1.8%) is expected to surpass the US (0.5%) in growth rate.

She also noted that although the yen-dollar exchange rate has fallen nearly 12% from its yearly high, it is still about 19% lower than the 10-year average, indicating a historically undervalued phase, and that the potential increase in the yen's share in various countries' foreign exchange reserves provides grounds for a medium- to long-term yen strength outlook.

Keith Juuks, Chief Currency Strategist at French financial firm Soci?t? G?n?rale, also mentioned the possibility of the yen-dollar exchange rate falling to 125 yen as the market responds to the BOJ's hawkish (monetary tightening preference) stance.

This content was produced with the assistance of AI translation services.