Can investors continue to count on a weak yen in 2025?
5 February 2025
Investors, entrepreneurs and corporates across global markets are bracing themselves for an onslaught of exchange-rate volatility this year. Securities-backed financing can help long-term investors manage their exposure and meet any immediate liquidity needs.
For examples of FX swings, one need look no further than some of Asia’s markets. The Bank of Thailand has forecast increased volatility for the Thai baht in 2025 due to a combination of external economic factors, geopolitical tensions and unpredictable policies.[1] Malaysia’s ringgit made a turbulent start to the year, with renewed weakness against the US dollar.[2]
Indonesia’s rupiah has also weakened in recent months, putting pressure on the central bank’s monetary easing measures.[3] And the Indian rupee has hit record lows in recent weeks and is widely expected to extend losses on the back of a stronger dollar.[4]
Perhaps the currency most closely watched by investors globally is the Japanese yen. In mid-December, the Bank of Japan (BoJ) surprised by holding its benchmark interest rate steady at 0.25%, going against market consensus of a 0.25% hike. This led to a dip in the yen, with analysts saying a weaker yen would remain a risk in 2025.[5]
Market watchers believe the BoJ will raise the policy rate to 0.5% in January and then potentially to 0.75% in July, but the central bank’s caution at its latest meeting is a far cry from the hawkish tone it sounded in June 2024 – which had triggered a sharp but short correction in Japanese equities soon after.
Dollar, renminbi influence
The US Federal Reserve’s approach to rates will also have consequences for the yen. Expectations of a more measured pace of rate cuts by the Fed in 2025 could keep rate differentials between the US and Japan wider for longer, putting downward pressure on the yen.
If the US dollar strengthens further as financial markets get a clearer idea about the policies of incoming president Donald Trump, a weak yen may become a major driver of the BoJ’s rate decisions in 2025.
This means the differing tones of the BoJ and the Fed could give further impetus for carry traders to bet on future yen weakness, according to Saxo Markets.[6]
Pressure on growth in Japan certainly doesn’t seem to support a stronger yen. Gross domestic product grew 1.2% in the third quarter of 2024, slowing from the previous quarter’s 2.2% increase, with consumption up a meagre 0.7% and limited growth in real income.
And there is also another, less appreciated, factor weighing on the yen – a possible decline in China’s renminbi.
If Trump follows through on his promise to impose a big increase in tariffs on imports from China, Beijing could allow its currency to depreciate to help offset the impact. A recent Goldman Sachs analysis concluded that the Japanese yen was more sensitive to moves in the renminbi than global peers – meaning big changes by China to manage its currency could exert downward pressure on the yen.
That’s the outcome Japan’s exporters will be hoping for. Japan’s exports beat expectations by rising 3.8% in value in November year-on-year, led by chip-making machinery and non-ferrous metals, while cars dragged on shipments. However, export volumes dipped 0.1%, suggesting the growth in value was largely driven by the yen’s weakness.[7]
The yen may very well come under further pressure. Oxford Economics has cut its yen outlook to reflect a stronger US economic outlook and a higher US yield outlook. It also pointed out that in case of a global trade war scenario, the Japanese economy would have to contend with higher tariffs, weaker global demand and further yen depreciation. The result would be more pressure on consumption in Japan, delaying the recovery of households’ real income, and as a result, GDP.[8]
The start to 2025 hasn’t helped. In the first full week of January, the yen approached a critical level of 160 to the dollar, prompting Japan’s finance minister to issue a fresh warning against speculative yen selling.[9]
Managing risks
No matter what trade policies eventually emerge from the US, investors need to be prepared for currency volatility to be a major factor impacting portfolios this year. One way to mitigate some of the risk is through securities-backed financing.
Securities-backed financing allows investors to borrow against the value of their existing portfolio of liquid securities, without sacrificing the long-term potential of these assets. For sophisticated and professional Japanese investors and entrepreneurs exposed to currency volatility, this means they can access dollar or yen liquidity without liquidating their holdings, avoiding potential losses if exchange rates are unfavourable.
Securities-backed financing also allows investors to hedge against adverse currency movements, seize arbitrage opportunities rapidly when currency movements create price distortion and quickly adapt and rebalance portfolios. All of these would be critical ammunition for an investor in the months ahead.
By serving as a tool to access liquidity and manage currency risks, securities-backed financing provides an efficient way to navigate what is expected to be a rocky FX market in 2025.
[1] https://www.nationthailand.com/business/banking-finance/40044880
[2] https://www.thestar.com.my/business/business-news/2025/01/07/volatility-returns-to-currency-market
[3] https://www.bloomberg.com/news/articles/2024-12-18/indonesia-holds-key-rate-to-bolster-falling-rupiah-currency
[4] https://www.bloomberg.com/news/articles/2025-01-09/indian-rupee-hedging-costs-highest-since-2022-on-bearish-bets?srnd=homepage-asia
[5] https://www.oxfordeconomics.com/wp-content/uploads/2024/12/Japan-The-BoJ-postponed-a-rate-hike-to-analyse-more-data.pdf
[6] https://www.bnnbloomberg.ca/business/international/2024/12/19/yens-outlook-worsens-as-boj-skips-rate-hike-strategists-say/
[7] https://www.reuters.com/world/japan/japans-exports-expand-faster-than-expected-november-2024-12-18/
[8] https://www.oxfordeconomics.com/wp-content/uploads/2024/12/Japan-We-expect-mixed-impacts-from-Trumps-second-presidency.pdf
[9] https://www.reuters.com/markets/currencies/japan-finance-minister-issues-fresh-warning-against-weak-yen-2025-01-07/
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