Those dreams of a budget-friendly holiday to Japan are fast evaporating.
An abrupt change has occurred to the trend that saw a weaker yen hand foreign tourists a chunky boost to their spending power. The yen is now strengthening — on Thursday, the currency hit a four-month high in New York and rallied further Friday.
So, can would-be holidaymakers still salvage something? Here’s all you need to know:
Why has the yen risen?
Traders have essentially ratcheted up bets that the BOJ, the last central bank in the world with negative interest rates, will scrap that policy much sooner than thought. Sparking this change in sentiment was the central bank’s leaders indicating they may be preparing a shift in policy.
The wide interest rate gap between Japan and the U.S. had left the yen mired in a trend of sustained depreciation. Should the Bank of Japan raise and narrow that gap, traders believe that the bearish trend will reverse, bolstering the Japanese currency.
On Thursday, the currency briefly jumped almost 4% during the New York session and advanced as much as much as 1.1% against the dollar Friday before paring its rise.
Read more: Traders pile into bets that end of negative BOJ rate is near
Haven’t we recently been hearing about how the yen’s really weak?
Er, yes, that’s right. Only last month the currency was on the cusp of a 33-year low versus the dollar.
The BOJ’s policy of keeping interest rates negative while the Federal Reserve and other central banks have been on a hiking cycle drove the yen’s weakness and made dollar-denominated assets more attractive for investors.
Read more: Why the Yen is so weak and what that means for Japan: QuickTake
What does mean for my trip to Japan?
Your money won’t go quite as far, which means most things you buy while there will cost you a bit more — hotels, food, trinkets, etc.
In good news, the price of flights to Japan may not rise. The capacity on routes to the nation from the U.S. is scheduled to increase in the first half of next year, Scott Keyes, founder of the airfare deals subscription service Going, told Bloomberg in November. As competition between the airlines increases, prices should fall.
And if you want to consider the exchange rate over a longer time period, the yen is still close to its weakest in decades.
Read more: Japan becomes fastest-growing destination in 2023, Amex says
Are economists in agreement with traders?
Mainly. Economists increasingly expect the BOJ to achieve its inflation target, but they’re less aggressive than traders in expectations for how soon it will move. A growing majority of economists forecast that the negative-rate regime will end by April, according to a Bloomberg survey.
And what’s the outlook?
The most bullish forecast tracked by Bloomberg has the yen strengthening to 125 per dollar by the end of 2024, a gain of about 14%. While that wouldn’t happen overnight should the BOJ suddenly raise rates, when the central bank shocked the market last year by loosening its cap on yields, the yen jumped 4%.
It’s worth remembering that the policy path for the BOJ is complicated — on Friday, gross domestic product data showed the nation’s economy shrank at the sharpest pace since the height of the pandemic.
This muddies the calculus for the central bank as it waits for more evidence that a positive wage-price cycle is in place before stepping back from a massive stimulus experiment of more than a decade.
When will we know what the BOJ is going to do?
The BOJ meets Dec. 18-19, followed by another policy gathering in January. Meetings in March and April will come after the results of next year’s labor union pay negotiations emerge.
Economists are focused on whether BOJ Gov. Kazuo Ueda gives any indication of changes to come in a policy statement or at his press conference after the December decision, rather than expecting any outright change in settings that soon.
Is there any silver lining for holiday-makers?
Well, yes, if you’re in Japan, being paid in yen — it just got more affordable to go on overseas holidays.
And if you booked a trip to Japan when the yen was weak and have already exchanged your spending money, enjoy feeling smug.