Travelling is arguably among the favourite pastimes of Hong Kongers, with Japan a top choice as a destination. Japan remains the fourth most popular touring destination for Hong Kongers, accounting for 11 per cent of all outbound tourists, according to a December 2023 Hong Kong government household survey. Also, a substantial portion like to revisit Japan. In the first quarter of 2024, nearly 70 per cent of tourists from Hong Kong had been to Japan at least four times, with 30 per cent of them having visited 10 or more times, according to a survey cited by itehk.com on 17 July.
This summer, however, travellers to Japan may suffer from the unfavourable exchange rate, with the US dollar buying 12 per cent fewer yen, from 162 to 142 between 3 July and 5 August, the yen’s strongest since 2 January, although it depreciated somewhat thereafter.
Dollar-yen exchange rate and Nasdaq Composite Index, 8 August 2024
Travellers planning their next holiday to Japan will be wondering which direction the yen will take in the coming weeks and months. Let’s look at the factors affecting the yen’s short-term trajectory.
Multiple factors fuel yen appreciation
The yen’s appreciation against the US dollar in July was mainly driven by weak US economic performance, and demand for the yen as a haven, a safe place to park money when other currencies are experiencing volatility. July US job growth was weaker than expected, intensifying market concerns about economic recession. Continued weakness in manufacturing further reinforced the pessimistic market sentiment, exerting selling pressure on the US dollar.
On the other hand, escalation of geopolitical tensions, such as the growing hostility between Israel and Iran, fuelled safe-haven demand for the yen.
The soaring yen increased the price of exchanging foreign currencies back into yen for yen loan repayment. That led to a higher risk of loss-making for investors who borrow yen for carry trade. Carry trade is a trading strategy in which investors borrow the yen due to its low interest, and invest in other assets that may provide higher returns, such as US tech stocks. Barclays analysts described the yen as the most overbought of the major currencies, the Business Standard reported. And, on these grounds, selling pressure on the yen was high.
Unexpected Japan interest rate hike
On 31 July, contrary to market expectations of no change, the central Bank of Japan raised the interest rate from 0-0.1 to 0.25 per cent. The bank also indicated it would halve its monthly bond purchases over the next couple of years to strengthen the yen and economic growth.
The move further fuelled yen appreciation, increasing the borrowing cost for yen-funded carry trade. Hence, investors flocked to unwind their carry trades, to lower their risk of a narrower profit margin or even a loss.
The softer-than-expected US economic data, such as the July jobs report, intensified market expectations of a September interest rate cut by the Federal Reserve, and the yen and financial markets plummeted in early August as a result.
To calm the market, Bank of Japan Deputy Governor Shinichi Uchida said on 7 August that the bank would be more cautious around the timing of the next interest rate hike when financial and capital markets are unstable. Thereafter, the yen stabilised somewhat.
Mild short-term appreciation amid volatility
Looking ahead, in the short term, the difference in interest rates between Japan and other key economies is likely to contribute to continued yen fluctuation, with greater volatility.
According to the summary of the BOJ policy meeting on 31 July, publicised the day after Uchida made his comments, some of the bank’s board members sided with raising the interest rate. One member even indicated that the target should be set at 1 per cent. This contradicted Uchida’s stance to minimise potential adverse impacts on the yen and financial markets through a measured pace of rate hikes. This would also slow the unwinding of carry trade in the near term.
Meanwhile, the economic growth of some other major economies is also slowing, including the US and UK, and they are likely to cut interest rates aggressively in the coming months.
This would result in a narrowing of interest rate differentials between Japan and other major economies in the coming months, helping to support yen strength. The narrowing differentials will also limit any potential growth of yen-funded carry trades.
Furthermore, the risks associated with the US election, a US interest rate cut, and geopolitical tensions, will further discourage investors from entering carry trades. Thus, safe-haven demand for the yen is likely to increase periodically in response to these risk factors.
As a result, the yen’s volatility may increase in the coming months, but the currency is likely to remain on an appreciation trend in the second half. Therefore, travellers planning a summer or autumn visit to Japan could consider accumulating yen when it weakens.
Disclaimer: This is an analysis of economies and financial markets. Nothing in this article constitutes professional and/or financial advice. The reader assumes the sole responsibility of evaluating the merits and risks associated with the use of any information.
