Against the backdrop of debate over whether higher US interest rates will drive dollar appreciation while Bank of Japan rate hikes lead to yen appreciation, an independent model by Ichikawa Yusuke (市川雄介) of the Hitachi Research Institute indicates that the dollar-yen rate is likely to remain in the upper ¥150s over the next six months.
Since the yen-buying intervention at the end of July, attention regarding US-Japan interest rates has shifted to persistently high US rates and Japan's real interest rates. The US is expected to continue raising rates gradually through next spring, keeping both short- and long-term rates elevated, while a decline in energy prices is difficult to envisage. The Bank of Japan may accelerate the pace of rate hikes to roughly once a quarter, but real interest rates are not expected to turn positive until the middle of next year or later.
The model estimates that higher US interest rates will drive a stronger dollar and weaker yen, while changes in Japanese interest rates will have no significant impact on exchange rates unless real interest rates are positive. Going forward, movements in US interest rates and the timing of Japan's real interest rates turning positive are expected to determine the direction of the dollar-yen rate.
US interest rates are expected to remain high until around next spring, while the Bank of Japan is expected to accelerate the pace of rate hikes to some extent over the course of the year. As a result, yen depreciation pressure is likely to remain strong for at least the next six months. The model's actual estimate as of the end of September is in the ¥170 range per dollar, but because the US and Japanese authorities are not expected to tolerate yen depreciation beyond ¥160 per dollar, the rate is expected in practice to remain in the upper ¥150s. The yen could turn stronger when US interest rates level off and Japan's real interest rates move into positive territory.
The rate is expected to be in the mid-¥140s per dollar at the end of next year. However, the possibility of a turn toward yen appreciation could disappear depending on developments in the Middle East and on Bank of Japan appointments and the government's stance on rate hikes. Overall, the period of high uncertainty is expected to continue.