The yen is still wasting no time in slumping to the bottom of the G10 currency charts. 

We have talked many times about the fact that the yen is the key advanced-country currency right now because its monetary policy is out of line with others and it is seeing much more volatility as a result.

Late last year the yen managed to unwind a good deal of the previous weakness as expectations of tighter BoJ policy mushroomed. But that’s gone into reverse again so far this year as the yen has tumbled in the wake of the recent earthquake in the country. Is this a temporary setback to hopes for tighter BoJ policy and a stronger yen, or does it represent the possibility that the yen could have another torrid year, much like most of 2023?

The yen is still wasting no time in slumping to the bottom of the G10 currency charts. So far it has been the weakest G10 currency performer this year with the dollar gaining the most at the yen’s expense. Implied volatility levels in the yen have surged again and the gap in one-month implied vol between dollar/yen and euro/dollar has risen sharply to around 4-vol which is very high in historical terms and reflects the fact that, no matter how much dollar/yen moves, euro/dollar is unable to escape the clutches of the 1.05-1.10 range for very long.

The earthquake in the Ishikawa prefecture on New Year’s Day appears to have set off the weakness in the yen. That’s the reverse of what happened the last time a major earthquake and tsunami struck, as a result of the Fukushima nuclear power plant failure in March 2011. For then the yen surged – to record highs against the dollar.

When one earthquake causes yen strength and another yen weakness it only serves to highlight what we’ve said many times before, which is that history is a good guide to the past. The Fukushima disaster was much, much larger and spurred speculation that Japanese firms would have to repatriate yen quickly to shore up damaged operations at home. The plunge in stocks may have also led to yen demand as overseas speculators betting on higher stocks were forced to raise yen to meet margin calls.

The recent earthquake has been far less destructive, with a more negligible effect on likely repatriation and stock prices; but it also comes at a time when the BoJ is seemingly in the midst of devising a route to higher policy rates; a route that might be at least temporarily obstructed by the earthquake. But here we would put the emphasis on the word ‘temporary’.

For while it might be argued that the economic ill-effects of the Fukushima disaster in 2011 were part of the reason for a long-lasting monetary easing programme from former BoJ Governor Kuroda, when he became head in 2013; the Ishikawa earthquake seems unlikely to usher in any sort of long-lasting policy change. The disaster might have capped any idea that the BoJ could start to lift the policy balance rate as soon as this month’s meeting but, in our view that was a long-shot anyway. We have targeted a rate hike in April and continue to do so in spite of the earthquake.

“This suggests to us that, while the yen may well remain far more volatile than the euro this year, and probably more volatile than most other currencies, it won’t be the weakest currency in 2024. Quite to the contrary; we think it will be the strongest as the divergence in monetary policy between the BoJ and other developed-country central banks unwinds the significant weakness that we have seen in the yen since the spring of 2022. Against the dollar it means that we are targeting a year-end level of around 125 which is 10-yen lower than the 135 consensus from analysts in the Reuters survey”, said Mr. Steve Barrow, Head of Standard Bank G10 Strategy.