4 November 2024
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As we approach the end of the year, the JPY is still the worst performing currency in the G10 space, losing c7.2% against the USD year-to-date and c5.5% against the USD in October (Bloomberg, 31 October 2024).
While the JPY’s underperformance in October was due to continued USD strength on the back of rising US yields and political uncertainty in the US, markets seemed to be concerned about Japan’s political uncertainty amid the lower house election result and potential implications for the Bank of Japan (BoJ). The 27 October snap general election concluded with the ruling coalition (i.e., the Liberal Democratic Party (LDP) and Komeito) securing 215 out of 465 seats, short of the 233 needed for a majority – marking the first defeat for the ruling coalition since 2009. Some of the smaller parties that the ruling coalition would likely work with – namely the Democratic Party for the People (28 seats) and Japan Innovation Party (38 seats) – have earlier spoken out against the BoJ’s recent rate hikes (Reuters, 28 October 2024). Parliament will have to vote on the Prime Minister by 26 November.
Meanwhile, the BoJ kept its policy rate unchanged at 0.25% on 31 October, as widely expected. The BoJ noted that the Japanese economy was moving broadly in line with projections which are almost the same as those made in July (see the table below). The JPY was slightly stronger after Governor Kazuo Ueda mentioned that currency moves are having a big impact on the economy and price trends. Our economists still expect the BoJ to raise its policy rate to 0.50% in January 2025, and markets are now pricing in a c60% chance for such a hike.
Source: Bloomberg, HSBC
Source: Bloomberg, HSBC
It is worth noting that the recent rise in USD-JPY has been much faster than the widening of the US-Japan yield differential (Chart 2). The last time a significant gap opened up was in 2Q24, which Japan’s Ministry of Finance (MoF) eventually took action to curb what it deemed as speculation and excessive JPY weakness. While such divergence is likely to be noticed by the MoF, moves in USD-JPY will hinge on US developments over the near term. Looking further out, we still think USD-JPY may fall later with the Federal Reserve (Fed) easing and the BoJ normalising.
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