Why your Japan holiday just got pricier

Those dreams of a budget-friendly holiday to Japan are fast evaporating.

There’s been an abrupt change to the trend that saw a weaker yen hand foreign tourists a chunky boost to their spending power in Japan. The yen is now strengthening –

the currency hit a four-month high in New York

and rallied further earlier in December.

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 Bank of Japan (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 that they may be preparing a shift in policy. 

The wide interest rate gap between Japan and the United States had left the yen mired in a trend of sustained depreciation. Should the BOJ hike and narrow that gap, traders believe that bearish trend will reverse, bolstering the Japanese currency.

The currency advanced as much as 1.1 per cent against the US dollar on Dec 8, after briefly jumping almost 4 per cent in New York overnight. The yen strengthened to about 107 against the Singdollar on Dec 14.

Haven’t we recently been hearing about how the yen’s really weak? Er, yes, that’s right. Only in November, 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.

What does it 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.

The good news? The price of flights to Japan may not rise. For instance, the capacity on routes to the nation from the US is scheduled to increase in the first half of 2024, Mr 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. 

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.

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 per cent. While that wouldn’t happen overnight should the BOJ suddenly raise rates, when the central bank shocked the market in 2022 by loosening its cap on yields, the yen jumped 4 per cent.

It’s worth remembering that the policy path for the BOJ is complicated – gross domestic product data showed the nation’s economy shrank at the sharpest pace since the height of the Covid-19 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. 

The BOJ meets on Dec 18 to 19, followed by another policy gathering in January. Meetings in March and April will come after the results of 2024’s labour union pay negotiations emerge.

Economists are focused on whether BOJ governor Kazuo Ueda gives any indication of changes to come in a policy statement or at his press conference following the December decision, rather than expecting any outright change in settings that soon.

Any silver lining for holidaymakers?

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, you can enjoy feeling smug. BLOOMBERG