What can change the exchange rate of the yen against the dollar

On Friday, the yen briefly strengthened after the publication of preliminary data showing Japan's GDP growth in the second quarter above expectations. This has increased speculation about a possible rate hike by the Bank of Japan this year.

Nevertheless, the currency remains weaker than expected, even despite the reduction in the yield spread of 10-year US and Japanese bonds, which usually supports the yen. The yield on U.S. Treasury securities declined, while Japanese yields remained almost unchanged.

The investment climate in Japan remains stable: after the conclusion of the trade agreement with the United States, the Japanese stock market has outperformed most of the world's, and foreign investors continue to make net asset purchases. Portfolio investment flows remain balanced due to the steady interest of Japanese players in foreign securities.

Analysts note that this year the traditional correlation of the yen with yields and stock market dynamics has weakened, which may be due to changes in currency hedging, especially among Japanese life insurers, or to an increase in risk premiums for individual American assets.

A sharp reversal of the exchange rate is possible if the Bank of Japan takes a tougher stance — the likelihood of this has increased against the background of strong GDP and sustained inflationary pressures. An additional support factor could be the mitigation of trade conflicts. The basic forecast assumes a gradual strengthening of the yen with a chance of accelerated growth if favorable market conditions coincide.