Japanese Yen Could Test 2024 Low Against US Dollar, UOB Analysts Say

Analysts at United Overseas Bank (UOB) have indicated that the Japanese yen still has room to decline against the US dollar, potentially revisiting its 2024 low in the coming months. The assessment comes amid persistent interest rate differentials between Japan and the United States, which continue to weigh on the yen’s valuation.

UOB’s View on USD/JPY Trajectory

In a recent research note, UOB’s foreign exchange strategy team highlighted that the broader trend for USD/JPY remains tilted toward yen weakness. The bank noted that while the pair has experienced periodic pullbacks, the underlying momentum favors further depreciation of the Japanese currency. The 2024 low, which was recorded earlier this year, remains a plausible target if current macroeconomic conditions persist.

The analysis points to the Bank of Japan’s (BoJ) cautious approach to monetary policy normalization as a key factor. Despite some market speculation about a potential rate hike, the BoJ has maintained an accommodative stance, keeping Japanese government bond yields relatively low compared to US Treasury yields. This yield gap continues to attract carry trade flows, putting downward pressure on the yen.

Market Context and Implications

The yen has been one of the worst-performing major currencies in 2024, falling sharply against the dollar as the Federal Reserve maintained higher interest rates to combat inflation. While the Fed has signaled potential rate cuts later this year, the pace and magnitude remain uncertain, leaving the dollar supported.

For Japanese importers and consumers, a weaker yen increases the cost of imported goods, particularly energy and raw materials, which can fuel domestic inflation. Conversely, Japanese exporters benefit from a weaker currency, as their products become more competitive abroad and repatriated profits are worth more in yen terms.

What This Means for Traders and Investors

Forex traders should watch for key support and resistance levels around the 2024 low. A break below that level could accelerate yen selling, while any unexpected hawkish shift from the BoJ or a sharp decline in US yields could trigger a reversal. UOB advises that the path of least resistance remains higher for USD/JPY in the near term.

Conclusion

UOB’s analysis reinforces the view that the Japanese yen faces continued headwinds against the US dollar, with the 2024 low within reach. The outcome will largely depend on central bank policy decisions and global risk sentiment. Investors and businesses with yen exposure should remain vigilant and consider hedging strategies to manage currency risk.

FAQs

Q1: Why is the Japanese yen weakening against the US dollar?
The yen is under pressure primarily due to the interest rate differential between Japan and the US. The Federal Reserve’s higher rates attract capital to dollar-denominated assets, while the Bank of Japan maintains ultra-low rates, reducing the yen’s appeal.

Q2: What is the 2024 low for USD/JPY?
The exact level varies by source, but the yen hit its weakest point against the dollar in several decades earlier in 2024, with USD/JPY trading above 160.00 at one stage.

Q3: Could the Bank of Japan intervene to support the yen?
Yes, Japanese authorities have historically intervened in the forex market to curb excessive volatility. However, intervention is typically reserved for disorderly moves rather than to defend a specific level.