- The Japanese yen is one of the worst-performing Asian currencies this year.
- The weak yen has helped the country's tourism industry, with visitor numbers surpassing pre-pandemic levels.
- However, analysts expect the yen to recoup some losses against the dollar on policy moves from the Fed and BOJ.
If you were planning to take advantage of the weak Japanese yen to visit the Land of the Rising Sun, you might have missed the best time.
The Japanese yen fell to a nearly 33-year-low against the US dollar just last month — but it's already recovered some.
One US dollar can now buy about 143 yen, as compared to nearly 152 yen in early November — and the Japanese currency may strengthen further in the coming months, analysts say.
The yen is one of worst-performing currencies in Asia this year, having lost as much as 14% against the dollar. The Japanese currency has regained some ground and is now about 8% lower year-to-date.
The yen's weakness over the last two years has been due to a divergence between the US and Japan's monetary policies. The US Federal Reserve had been hiking interest rates to fight inflation, while the Bank of Japan, or BOJ, continued with its years-long ultraloose monetary policy aimed at spurring inflation and growth in the stagnant Japanese economy.
The central bank policies sent the US dollar on the rise, while the yen floundered.
Even so, the weak yen has helped Japan's tourism industry following the COVID-19 pandemic. In November, over 2.52 million foreign visitors made their way to Japan — surpassing the same period in 2019.
The market is expecting the BOJ to scrap negative interest rates by next spring and is betting on the dollar-to-yen rate to decline over the next 12 months, according to the consensus view of analysts on Refinitiv. Analysts are expecting the yen to fall to 142.43 against the greenback in six months and to 137 in 12 months.
Japan's core inflation rate rose 2.7% in October from a year earlier — the 19th straight month price increases are above the BOJ's target level.
However, BOJ Governor Kazuo Ueda cited "extremely high" uncertainty over the economic outlook and signaled a need to see sustainable inflation and wage growth before adjusting monetary policy.
Still, Takahide Kiuchi, an executive economist at Nomura Research and a former BOJ policy board member, told Business Insider that Japan's growth is likely to slow next year, with wage increases unlikely to keep up with inflation. The weak yen contributes to inflation because it makes imports more expensive.
"Real wages will continue to decline, suppressing personal consumption," said Kiuchi.
However, given the Fed's rate-cut signals and the subsequent weakening in the US dollar, the BOJ may not be in a rush to raise interest rates.
"The Fed's likely turn towards gradual cuts next year should also result in a modest appreciation of the yen, taking pressure off the central bank to respond with further hikes," Bank of America economists wrote in a December 14 note.