According to BNY’s Geoff Yu, the Japanese Yen (JPY) has gained structural support from regional flows, which is significantly impacting Asia-Pacific (APAC) foreign exchange (FX) dynamics by alleviating previous effective exchange rate pressures and enabling more nominal appreciation in regional currencies [1]. Yu highlights that the JPY’s influence in regional FX trade-weighted baskets is often underestimated outside of the USD/JPY pair, despite Japan being a major trading partner and competitor for economies in the region [1].
Previously, a weak JPY had been pushing up the real and nominal effective exchange rates of other APAC currencies, limiting their potential for appreciation [1]. However, the recent strengthening of the JPY, combined with U.S. tolerance for dollar weakness, has created opportunities for other regional currencies to appreciate in nominal terms. A stronger JPY offsets gains on the dollar leg, while persistent U.S. inflation prevents excessive dollar weakness in real terms [1].
BNY’s outlook remains structurally constructive on the JPY, as well as the Korean Won (KRW) and Chinese Yuan (CNY), as long as current-account support persists [1]. However, the report cautions that a renewed oil shock could reverse these gains, weaken regional FX, and potentially force further reserve-asset liquidation across Asia [1].
The analysis suggests that market participants should monitor energy prices closely, as they represent a key risk factor for the region’s FX stability [1].
CONCLUSION
The Japanese Yen’s recent strength is reshaping APAC currency dynamics, providing structural support and enabling appreciation in regional currencies. However, the outlook remains contingent on current-account balances and energy prices, with a renewed oil shock posing a significant downside risk.