TOKYO – Three straight years of outsized declines in the yen look set to end in 2024.

That is the view of market participants polled by Bloomberg, who on balance see the currency rallying in 2024 as the Bank of Japan (BOJ) exits the world’s last negative interest rate regime and its global peers cut borrowing costs.

While projections for a 2023 yen rebound started going wrong as early as February, forecasters see key differences this time around.

A year ago, traders were speculating that a new chief at the BOJ might unwind ultra-easy monetary policy.

Now they are aligned with economists who say a shift will come within months, and the central bank’s own leadership has publicly discussed the implications of a future exit.

“The situation won’t disappoint the yen bulls on this occasion,” said Mizuho Securities strategist Shoki Omori, who sees the prolonged slump in the currency coming to an end. “There’s not a lot of room for the BOJ to tighten policy, but they do seem determined to rip up negative interest rates.”

The picture outside Japan also looks clearer than it did 12 months ago. Whereas traders in 2022 were talking about US interest rates likely peaking in 2023, projections in December from Federal Reserve policymakers point to 75 basis points of cuts in 2024.

The median of forecasts compiled by Bloomberg indicates the yen will strengthen to 135 versus the US dollar by the end of 2024, as the wide interest gap between the United States and Japan narrows. Their overly bullish projection about a year ago was for the pair to trade around 131 at the end of 2023.

The yen was trading at 142.43 at 9.16am in Tokyo on Dec 18.

“The Federal Reserve ultimately rose by 100 basis points in 2023, while the Bank of Japan maintained its negative key rate, which was a major headwind for the yen,” said Mr Spencer Hakimian, chief executive of Tolou Capital Management in New York. He sees the “reverse scenario” playing out in 2024 and expects the yen to reach about 135 by the end of the year.

The 10-year US Treasury yield, which has been a major driver of the dollar-yen’s direction in 2023, has dropped about 50 basis points over the past month, setting the scene for a change in the currency market.

“It does seem that bond yields have now peaked, the Fed has finished hiking and the dollar has further to fall in 2024,” said Mr Kit Juckes, chief foreign exchange strategist at Societe Generale in London.

“The yen should make substantial gains.”

Yet, there is still room for a lot of volatility. The yen rallied almost 4 per cent in just one day earlier in December amid a short-lived spike in bets that the BOJ would hike rates at the conclusion of its Dec 18 to 19 meeting. It reversed course over the following two days before strengthening again.

Policy gatherings in Tokyo in January and March provide more triggers for speculation in the build-up to an April decision in 2024 that is seen by a majority of BOJ watchers as the most likely time for change.

While inflation has remained above the central bank’s 2 per cent target for more than 1½ years, officials appear keen for more evidence of solid wage growth, which may come during pay negotiations early in 2024.

“We believe that there is sufficient longer-term structural improvement in the economy,” said Mr Steven Barrow, London-based head of Group of 10 strategy at Standard Bank, which has a one-year forecast of 125 for the yen.

Mr Barrow sees the currency appreciating over the longer term, regardless of whether rate differentials narrow.

He cited positive change in Japan, including the end of deflation and the stock market rally. The benchmark Tokyo Stock Price Index equity gauge has soared about 23 per cent so far in 2023. BLOOMBERG