Among the largest developed-market peers, the Japanese currency has lost the most against the dollar this year.

Many analysts expected that 2024 would be a turning point for the yen after a three-year decline in the currency against the dollar.

According to Bloomberg forecasts, the yen was expected to strengthen from 141 yen against the US currency at the end of 2023 to 135 yen a year later.

However, instead, the yen continued to fall, approaching the level of about 152 yen. Among the largest currencies in developed countries, the yen has lost the most against the dollar this year, weakening by almost 7%.

Structural factors were expected to provide some support to the yen, including a significant current account surplus and attractive valuations (the yen is close to record lows against a basket of currencies weighted by trade prices).

However, the focus was on Japan’s monetary policy. In particular, the potential for Japan’s reflation to lead to higher interest rates for the first time since 2007 was seen as a key source of yen strength. The relative attractiveness of interest rates on currencies, as a rule, strongly affects currencies.

In March, in Japan, the bank canceled negative interest rates, purchases of exchange-traded funds and its program to limit government bond yields. What happens between the countries in the currency pair in question, as well as global conditions, may be of the same, and often more important. In the case of the yen, the biggest mistake was what happened not in Japan, but rather in the United States and around the world.

Most importantly, forecasters who were set on a rising yen assumed a repeat of the historical relationship between economic conditions in the United States and monetary policy, without sufficiently considering what might change this time.

At the end of last year, analysts expected that the most aggressive monetary tightening cycle in the last four decades would lead to a slowdown in economic growth in the United States and continued deflation, as it had been in previous economic cycles. This, in turn, will lead to a decrease in the base interest rate, which will make the dollar less attractive.