The Yen's Resurgence in 2025

In the unfolding panorama of global financial markets in 2025, the Japanese yen has exhibited a remarkable performance against the US dollarSince the beginning of the year, the yen has appreciated by approximately 3%, positioning itself as the standout currency among G10 currenciesThis impressive surge has attracted heightened scrutiny from investors and financial institutions around the world

Advertisements

A detailed report published by UBS analyst Shahab Jalinoos on February 12th delves into the underlying causes that propel this phenomenon, identifying the upward movement of Japanese interest rates and the growing market expectations of a "Plaza Accord 2.0" as the two significant drivers of this trend.

From a yield perspective, the performance of the Japanese 10-year government bond has been striking in 2025, with yields having surged more than 20 basis points, reaching their highest level since 2011. In stark contrast, the US 10-year government bond yield remains stagnant, maintaining levels similar to those seen at the end of 2024. This contrast has led to a widening of the interest rate differential between Japan and the United StatesIn the global financial sector, changes in interest rate differentials often act as an invisible hand guiding the flow of capitalAs Japanese bond yields rise substantially, international capital investors recognize the potential for higher returns, leading to an influx of investments into Japan's markets, particularly in government bonds and related assetsThis surge in demand for yen hence generates upward pressure on the currency, vividly reinforcing the yen's strong performance.

Moreover, the monetary policy stance adopted by the Bank of Japan has also significantly bolstered the strength of the yenPreviously, the central bank has signaled that as long as domestic wage growth remains within acceptable bounds, the possibility of raising interest rates still exists, even in the face of widespread global tariff risksExpectations of interest rate hikes have long been pivotal in influencing currency trends, as higher interest rates equate to greater returns for investors holding that currency

Advertisements

Consequently, the Bank of Japan's signal has instilled confidence among market participants regarding the yen's trajectory, further igniting their eagerness to purchase yen, thereby increasing its demand on foreign exchange markets.

Beyond the implications of interest rates, the market's anticipation of a "Plaza Accord 2.0" has further propelled the yen's riseLooking back at the historic Plaza Accord of 1985, this agreement was signed among the United States, Japan, West Germany, France, and the United Kingdom at the iconic Plaza Hotel in New YorkAt that time, the United States was grappling with staggering trade deficits and an economic downturnTo combat these challenges, the U.S. allied with other major economies to collectively devalue the dollar against other currencies through coordinated actionsThe direct impact of the Plaza Accord resulted in a significant depreciation of the dollar, with extreme fluctuations particularly against the yen, which saw the exchange rate plummet from roughly 1:250 to 1:200 within a mere three months, marking a staggering 20% declineSubsequently, the yen continued to appreciate, substantially influencing the global economic landscape.

Fast forward to 2025, which marks the 40th anniversary of the Plaza Accord's signingCurrent currency exchange issues have emerged as a pivotal risk facing the new U.S. administrationAgainst this backdrop, numerous market voices suggest that should the U.S. consider instigating a similar concerted effort as in 1985, Japan could likely emerge as a primary cooperative partnerThe UBS report highlights that Japan's real interest rates currently remain significantly low, with global perceptions largely viewing the yen as undervalued