The Japanese yen finally ended its rise against the USD in May after posting major gains over the previous year. With the downturn in the global economy, the yen began an unwanted increase against the dollar. Over the past two years, the Japanese economy has been in and out of recession and its economy remains at near stagnant levels. Despite expansive monetary policies, the yen rose 11 percent in the year through May, damaging Japan’s all-important export sector. But with the potential of an upcoming US interest rate hike, Japan’s currency may finally be headed for continued devaluation.
The yen fell 4.1 percent over the month of May and ended around 110.68 per dollar. However, the currency remains up over 8 percent this year so far. Traditionally, major economies in Asia - in particular, China, South Korea, and Japan – rely on currency depreciation to support their manufacturing and export sectors. Despite strength in the US economy, the yen remained stubbornly high, and Japanese Prime Minister Shinzo Abe was feeling pressure to ensure his policy of a weak yen was seen as strong.
Like the rest of the global economy, the US experienced subdued growth over the first quarter of the year. Investors who had expected an additional rate hike after December’s increase began reducing their expectations of multiple rate hikes this year. Invariably, this leads to a weaker dollar and strong currencies in other major regions. Japan relies on a weakened currency for foreign business investment and exports. Moreover, part of Abe’s mandate as Prime Minister included promising to reduce the value of the yen to help boost strength in the economy. But global factors persisted, and the yen remained stable.
Following the weak performance in the first quarter, the US economy showed signs of revitalization in the second quarter. Speculators have been awaiting a second interest rate hike from the Federal Reserve, a policy move that will impact global currencies significantly. Data released in May increased investors’ expectations of a US rate hike, sending the dollar up and Asian currencies down. The yen appears to be benefitting from this trend and finally ended its rise by the end of May. Analysts note that investors are likely making changes to their yen holdings in preparation for a rate hike from the Federal Reserve. Should the US raise interest rates, investors do not want to be left holding a currency that will subsequently devalue.