The dollar may lose strength under the Fed rate cuts, but the real currency threat lies in the yen: a divergence that threatens to upend global balances.
The dollar is creaking under the weight of Fed rate cuts, but the real currency risk isn’t coming from Washington: Tokyo is the fuse waiting to explode. With markets expecting a prolonged easing cycle in the United States, Japan is once again attracting global attention.
The Bank of Japan has maintained interest rates at 0.5%, but with a split board: 7 votes in favor of the pause, 2 against, calling for an immediate hike. This split signals the now concrete domestic pressure to normalize monetary policy after more than a decade of ultra-loose monetary policy.
On the price front, headline inflation has fallen to 2.7% thanks to government subsidies, but the core rate remains at 3.3%, supported by strong wage growth and resilient consumer spending. In other words: domestic momentum isn’t cooling, and the BoJ risks being left behind.
The FX market’s reaction
The USD/JPY remains near all-time highs, but forecasts for the fourth quarter point to a reversal: the yen strengthening toward 145 as early as October and potentially 140 by the end of the year. The divergence between expectations for US interest rates (falling) and Japanese interest rates (potentially rising) creates the conditions for a sudden repositioning by investors.
The issue of currency hedging costs
A technical but crucial factor: currency hedging costs for Japanese investors on US assets have already fallen and could reach 3% in the coming months. This makes capital repatriation much more attractive.
In practice, if risk-adjusted yields in the United States decline, while Japan offers a stable or rising rate environment, the natural flow tends to return home. For a country with substantial overseas holdings, including Treasuries and corporate bonds, the diminished appetite can become a powerful driver of the exchange rate.
The latent risk of the carry trade
The currency market thrives on delicate equilibria. The prospect of the BoJ starting to tighten while the Fed eases shines a spotlight on the carry trade. Many financial operators have for years borrowed cheap yen to invest in higher-yielding assets elsewhere. If the spread narrows, those positions become vulnerable to sudden liquidations.
It’s a sobering divergence: already in August 2024, a sudden imbalance linked to the carry trade had caused a sharp short-term shock, followed, however, by an orderly market recovery.
The Global Picture
At the macro level, the real risk is not so much the direction of individual central banks, but the asymmetry of monetary cycles. The Fed has entered an easing phase, while the BoJ is increasingly close to a shift toward tightening. This imbalance in global capital flows could amplify volatility on an international scale.
This is not a prospect to be feared, but one to be monitored carefully: in a world of interconnected markets, Tokyo’s movements could have an even more profound impact than those in Washington.
So?
The dollar appears fragile today, but the real unknown comes from the yen. This isn’t about creating alarmism: recent history shows that even sudden shocks like the one in August 2024 have been quickly absorbed by the system.
Rather, these dynamics serve as a reminder that currency risk is an integral part of any investment scenario. Contextualize, don’t fear: this is the key to navigating the coming months, in which the Japanese fuse could become the most surprising variable in the global market.
Original article published on Money.it Italy 2025-09-25 19:23:00.
Original title: Altro che il dollaro. È lo yen la vera miccia pronta a esplodere
