Japanese Yen 2024 Outlook: Traders See a Higher Yen as BoJ Policy Shift Nears

The Bank of Japan could soon be ready to raise interest rates

• Japanese yen (/6JZ3) surged in December to potentially end long string of losses.
• BoJ watchers expect a policy shift as soon as January, marking the end of ultra-loose monetary setting.
• The yen’s technical outlook received a classical bullish signal via the Ichimoku system.

The Japanese yen (/6JZ3) is trading near four-month highs in December as the end of the year approaches after comments from Bank of Japan (BoJ) members, including Governor Kazuo Ueda, suggested that the country is nearing an exit from its ultra-loose policy stance, pushing the currency 2.7% higher on Thursday for its largest gain since December 2022.

Japanese yen set for potentially explosive 2024

Because the BoJ was one of the few central banks that wasn’t aggressively hiking rates over the past several years, the yen languished to the weakest level in 30 years against the dollar. That has caused a rush of short trades against the Japanese currency, something that should help propel the yen higher now as those shorts cover ahead of an increasingly likely policy shift.

In fact, earlier this month, according to data from the Commitments of Traders report (COT) provided by the Commodity Futures Trading Commission (CFTC), net positioning among non-commercial traders, otherwise known as speculators, hit the shortest since 2017.

Currently, the BoJ’s policy rate is at -0.1%. That means it would only take a 10-basis point increase to bring rates out of negative territory. And while policymakers face challenges in shifting policy, such as the BoJ’s large balance sheet, an incremental 10 basis points (bps) lift shouldn’t rattle its economy all too much.

When do BoJ watchers expect the policy shift?

When will policy shift? BoJ watchers expect the change to happen in April, according to a Bloomberg survey. However, some see it happening as soon as January when the bank will also update its outlook for economic activity and prices.

We could also get more information in the bank's Dec. 19 policy announcement, which will be the last of 2023. If Ueda were to signal a potential move at the meeting, that would likely spur another drive higher and perhaps mark the start of a longer trend higher for the yen.

What needs to happen to support an exit from its ultra-loose policy?

The BoJ has already tweaked its policy, choreographing a potential exit from negative rates. In October, the BoJ redefined its 1% upper bound cap on 10-year yields while scrapping its pledge to vigorously defend the level through unlimited bond buying.

Now, if inflation remains above its 2% target, and it looks like it will, policymakers should have a path to making the shift to its interest rate. Last month, the nationwide core consumer price index (CPI) increased by 2.9% from a year ago in October.

November data is due near the end of December, and it is largely expected to remain above the bank’s 2% target, which would mark the 20th consecutive month above the mark.

Japanese yen receives bullish technical signal going into 2024

The yen received a bullish signal via the Ichimoku indicator, a classical system developed by Goichi Hosoda back in the 1960s. While the indicator could be used on any chart, it is most popular for the yen and thus generates the strongest signals.

Thursday’s move saw price shoot above the cloud, or Kumo—represented by the blue area on the chart, which is also projected 26 periods into the future. While we won’t dig into the specifics of the system here, several other buy signals have been generated by the indicator, including:

• The future Kumo is green, representing a bullish trend.
• Price is above the base line (yellow line on chart).
• Price is above the Tenkan-Sen, or conversion line (green line on chart below).
• The Chikou Span, lagging span entered the Kumo.

Trading the Japanese yen for 2024

Given the relatively low implied volatility (IV), represented by a 25.1 implied volatility rank (IVR), traders may want to position themselves long by purchasing calls or going long the futures contracts.

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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