Events this week will determine whether the yen has a record fourth annual decline in 2015, or is the year’s best-performing major currency.
With just days left, the currency has slipped 0.5 percent versus the dollar this year. That makes it the second-best performer among 16 major currencies against the greenback, behind the top-ranked Swiss franc, which has strengthened 0.8 percent. The yen advanced for four straight days through Friday amid declines in Japanese stocks.
“There’s the potential for more yen buying amid continued risk aversion,” Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., a margin-trading services provider, wrote in a note to clients. “If the market turns, it will not only derail a record fourth annual decline for the yen, the start of 2016 could be the beginning of three years of weakness for the dollar.”
The Topix index of stocks rose 0.7 percent Monday after completing five weeks of declines.
The yen’s 0.5 percent decline versus the greenback would be the smallest move in either direction over the course of a year since the 0.03 percent advance of 1992. In each of the past three years, the yen has declined at least 11 percent against the U.S. currency.
The policy divergence that has driven the yen’s 36 percent decline since the end of 2011 is waning, after the Bank of Japan refrained from expanding stimulus this year while twice pushing back its target for reaching 2 percent inflation. Traders expect the U.S. Federal Reserve to increase interest rates only about twice in 2016, futures indicate, after policy makers raised their benchmark this month for the first time in almost a decade.
Yen bulls are growing in number. Seventeen analysts now see it appreciating to at least ¥120 per dollar by the end of next year, versus 13 on Nov. 30. JPMorgan Chase & Co. has the most bullish forecast among the 60 or so compiled by Bloomberg, at ¥110 per dollar.
Meanwhile, a gauge of the greenback is headed for its biggest monthly loss since June. The Bloomberg Dollar Spot Index has dropped 0.9 percent so far in December.
If the yen strengthens beyond ¥120 per dollar, it could continue gaining until it reaches the Oct. 15 high of ¥118.07, according to Kengo Suzuki, chief currency strategist at Mizuho Securities Co. in Tokyo.
“If stocks and oil decline further, the yen will tend to be bought as a haven,” he said. “Whether this is a fourth year of a weaker yen against the dollar will go down to the wire.”