Outlook for Japanese Yen Remains Weak, Goldman Sachs Predicts

The Japanese yen is projected to remain weak in the coming months, according to an analysis by Goldman Sachs on Wednesday. Despite hitting a 33-year low against the US dollar in April, analysts at the firm believe the yen could stay at or above 150 to the dollar for the next year.

This prediction comes amidst a backdrop of steady depreciation for the Japanese currency since the beginning of 2023. Goldman Sachs economists attribute this trend to a confluence of factors, most notably the robust performance of the US economy and the delayed prospect of interest rate cuts by the US Federal Reserve.

"The yen tends to appreciate when recession risk is high," explained Michael Cahill, senior currency strategist at Goldman Sachs. "But we’ve seen the opposite recently. US growth remains surprisingly resilient despite high interest rates, which is weighing on the yen."

While the Bank of Japan (BOJ) intervened in the foreign exchange market in late April and early May to support its currency, these efforts appear to have had a limited impact. According to Tomohiro Ota, economist at Goldman Sachs Research, the BOJ’s current focus is on achieving sustainable inflation, not directly responding to fluctuations in the foreign exchange market.

"To the BOJ, the dollar-yen rate matters only when currency fluctuations have some impact on reaching their target," says Ota.

The analysts also pointed to the widening interest rate differential between Japan and the US as a contributing factor to the yen's weakness. This gap has made investing in US dollar-denominated assets more attractive for Japanese investors seeking higher returns.

Looking ahead, Goldman Sachs Research anticipates the BOJ will raise interest rates again in October, following a similar move in March. However, the economists believe the central bank will be cautious in its approach, focusing on managing inflation without stifling economic growth.

The research team expects the yen to remain around current weak levels for the remainder of the year and into 2025.

"The bottom line is that the macro environment should continue to weigh on this safe-haven currency, and the Fed cuts (and BOJ hikes) that we expect probably won’t provide that much support," explains Cahill.

Despite the yen's weakness, Goldman Sachs Research maintains a cautiously optimistic outlook for the Japanese economy. While GDP growth forecasts have been revised downwards (from 1.5% to 0.5%), analysts expect the country to avoid a recession and see modest growth throughout the remainder of the year, including a temporary consumption boost from an income tax cut over the summer.