Yen weakness since 2025 has been limited to offshore hours: analysis
The Japanese yen's depreciation since 2025 has occurred exclusively during offshore trading hours, a shift from previous years, according to Bank of America analysts. This offshore weakness is attributed to AI-driven equity rallies and the Bank of Japan's gradual monetary…
Intelligence analysis by Gemini 2.5 Flash
Bank of America research indicates that the Japanese yen's recent weakness, observed since 2025, has been confined to trading sessions in London and New York, diverging from earlier patterns where depreciation also occurred during Tokyo hours. This phenomenon is linked to Japan's improved balance of payments, AI-fueled equity performance, and the Bank of Japan's cautious approach to i…
Imagine the Japanese yen is like a toy car. For a while, it was losing speed all the time, whether it was playing in Japan or far away. But since 2025, it only loses speed when it's playing far away, like in London or New York, and stays steady when it's in Japan. This is because Japan is doing better with its money, but also because big computers (AI) are making other investments look more exciting, and Japan's central bank is being slow to raise its interest rates, making people borrow yen cheaply.
Analysis
Bank of America Analysis
Analysts Shusuke Yamada and Izumi Devalier from Bank of America published a research note on October 8, detailing the specific timing of the Japanese yen's depreciation. Their findings indicate that between the second quarter of 2025 and the second quarter of 2026, the yen's weakness was exclusively observed during offshore trading hours, specifically in London and New York. This marks a notable change from the period of 2021 through mid-2024, when the currency experienced depreciation during both Tokyo and overseas sessions. The analysis highlights a significant shift in the dynamics influencing the yen's value.
Monetary Policy and AI
The stabilization of the yen during Tokyo hours is attributed to improvements in Japan's balance of payments. However, the offshore weakness is linked to two primary factors: the artificial intelligence-driven equity rally and the Bank of Japan's (BoJ) gradual approach to monetary tightening. Strong Japanese equity performance encouraged international investors to engage in currency hedging, which generated additional yen-selling pressure. Concurrently, the perception that the BoJ was raising interest rates too slowly reinforced the yen's appeal as a funding currency, further contributing to its depreciation during offshore sessions. These factors created a unique environment for the yen's performance.
Intervention and Outlook
Pressures on the yen have recently moderated following coordinated currency intervention by Japanese and US authorities in July, alongside growing expectations of faster monetary tightening by the BoJ. Investor sentiment has also shifted, with the proportion of bearish investors on the yen falling from 60% in August to 30% in September. The research team anticipates the BoJ will raise its policy rate by 25 basis points in December 2026, March 2027, and July 2027, reaching 2%. Strategists recommend shorting USD/JPY, believing the balance of risks favors yen appreciation. They also warn that renewed intervention could occur if USD/JPY surpasses 160, and a correction in AI-related equities could further support the yen by reversing currency hedges and narrowing interest rate differentials.
Key points
- Japanese yen weakness since 2025 has been limited to offshore trading hours, primarily in London and New York.
- This contrasts with 2021-2024, when depreciation occurred during both Tokyo and overseas sessions.
- Offshore weakness is attributed to AI-driven equity rallies and the Bank of Japan's gradual monetary tightening.
- Improvements in Japan's balance of payments have contributed to yen stabilization during Tokyo hours.
- Coordinated Japanese and US currency intervention in July and expectations of faster BoJ tightening have moderated pressures.
- Bank of America strategists recommend shorting USD/JPY, expecting yen appreciation.
The coordinated currency intervention by Japan and the US, coupled with growing expectations of faster monetary tightening by the Bank of Japan, could lead to a stronger yen. This appreciation would reduce the cost of imported goods for Japan, potentially boosting domestic consumption and economic stability. A correction in AI-related equities could further support the yen by unwinding currency hedges and improving global risk appetite.
If the Bank of Japan raises interest rates too slowly, as some investors fear, the yen could remain attractive as a funding currency, leading to continued offshore weakness. Should the USD/JPY pair rise above 160, renewed currency intervention might be necessary, indicating persistent underlying pressures on the yen despite efforts to stabilize it.