After the Bank of Japan raised interest rates in July and the Federal Reserve recently signaled an upcoming rate cut, foreign exchange strategists have thoroughly reassessed the outlook for the yen.

Before the Bank of Japan announced another rate cut on July 31, many strategists warned that the trapped yen would weaken further. The yen has already fallen by about 12% against the US dollar in the first half of this year. Bank of America, ATFX Global Markets, and Royal Bank of Canada all warned in June that Japan's intervention in the market may not be able to prevent the yen from sliding, making it likely for the yen-dollar exchange rate to break through 160 again.

However, in the past few weeks, the views of yen observers have firmly inclined towards the currency maintaining its recent rise and possibly continuing to rise within this year. The core of these changing predictions is the expected narrowing of the US-Japan interest rate differential.

Federal Reserve Chairman Powell said last month at Jackson Hole that the time for a rate cut has come, while the Bank of Japan indicated in two research reports the possibility of further rate hikes. Governor Haruhiko Kuroda expressed a similar view when he commented in parliament.

OCBC Bank's foreign exchange strategist, Christopher Wong, said, "The impact of these events has given us more confidence to lower our expectations for the US dollar against the yen." The bank has lowered its year-end target price for the dollar-yen pair from 141 to 138. He said, "The beginning of a rate cut cycle by the Federal Reserve means that the policy rates of the Federal Reserve and the Bank of Japan are shifting from divergence to convergence."

Macquarie Group Limited is one of the most bullish institutions on the yen, with the company lowering its year-end target price for the dollar-yen pair from 142 to 135, a level last seen in May 2023.

Other companies also predict that the currency pair will soon break through 140. Standard Chartered currently expects the dollar-yen pair to reach 140 by the end of this year and 136 in the first quarter of 2025.

The rapid rebound of the yen from its lowest level in about 38 years in early July has caused many arbitrage trades in the global market to collapse. This also poses risks to the profits of Japanese exporters, whose profits have been driving the strong rise in the Japanese stock market until recently.

For those who predict the future trend of the yen, US economic data and the monetary policy of the Federal Reserve are still key.

After Powell's speech at the Jackson Hole conference, the US dollar encountered substantial selling, and the USD/JPY fell to 143.45, the weakest level since August 5. Futures traders are betting that the Federal Reserve will cut interest rates by at least 25 basis points in September, with a 1/4 chance of a 50 basis point cut.

Gareth Berry, a strategist at Macquarie, said that 90% of the reason for the change in Macquarie's forecast was the "Jackson Hole event," where "Powell actually committed to rate cuts in advance, and even hinted that he would take more aggressive easing measures if the labor market deteriorated."

Shinichiro Kadota, head of FX and rate strategy at Barclays Securities Japan, also believes that the yen will continue to rise. In the short term, he will pay attention to the employment data before the Federal Reserve's September policy decision. Kadota said, "If US employment data is weak, the US dollar may be further sold off."

Last Friday's US economic data weakened the reason for a significant rate cut by the Federal Reserve in September, causing the USD/JPY to rise, with the current trading price at around 146.17.

On the other hand, investors have significant differences on the timing of the next possible rate hike by the Bank of Japan, but they unanimously believe that the rate hike will come again, which supports the yen.

Although Governor Haruhiko Kuroda did not indicate an imminent rate hike, he emphasized in parliament that if the economy and prices remain in line with forecasts, the Bank of Japan still plans to raise interest rates.

Standard Chartered Bank stated that the remarks of the Bank of Japan's governor have strengthened market expectations for further tightening of monetary policy in Japan after the ruling party's leadership vote on September 27 to determine the next prime minister.

Strategists Steven Englander and Nicholas Chia from Standard Chartered Bank wrote in a report, "The market may be underestimating the hawkish outlook for the Bank of Japan in the fourth quarter."

Carol Kong, a forex strategist at Commonwealth Bank of Australia, said that she has not changed her year-end target price of 145 for the USD/JPY, but she believes that the currency pair will fall to 139 by the end of 2025.

However, some strategists still hold the view that the yen is expected to return to a downward trend.

Shusuke Yamada, the head of forex and interest rate strategy at Bank of America Securities Japan, said, "We do not believe that a rate cut by the Federal Reserve will lead to a stronger yen, as it is not the pattern of some previous rate cut cycles." The company predicts that the USD/JPY will rise to the range of 150-155 by the end of this year.

Editor/Rocky