It happens that one can’t see the forest for the trees. Large upward movements usually end in a resistance area or in a downtrend, which can only be seen in a price trend of over 30 years. Consolidations occur in zones of a former, perhaps briefly seen low point 15 years ago or an average line based on data from the last 30 years. In this article, I will continue with my medium-term outlook on the foreign exchange market.

In the past two weeks, I shared with you my outlook for the currency pair Euro against US dollar, and for gold. This week, I am providing you with a forecast for the currency pair US dollar against Japanese yen. This will give you a roadmap for the year 2024, which will be helpful in your own investment decisions regarding the USD/JPY currency pair.

1871 – the year of the introduction of the yen In 1871, the Meiji government introduced the Japanese yen based on European models. The government replaced the currency system that had been in place during the 250-year-long Edo period. In the beginning of the 1980s, Japan’s economic and financial power gained more and more ground. Due to the severely undervalued yen in 1972, Japanese industry was able to significantly increase its exports, allowing the yen to enter the international financial arena.

As the chart below shows, from 1978, one could get over 250 yen for one US dollar. Despite a positive trade balance, the yen could not gain value in the first half of the 1980s.

Figure 1: Chart analysis of US dollar against Japanese yen since 1978. Monthly chart displayed.

Source: TAI-PAN.

The era of carry trades In the early 1980s, the high interest rate difference between the United States and Japan caused the yen to remain weak until 1985. While investors in the US received over 12% in annual returns when investing in US government bonds, Japanese investors had to settle for 7%.

Hedge funds took advantage of this opportunity by borrowing in yen and immediately exchanging the money for US dollars. This allowed them to earn almost double the interest rates they had to pay for their debt. They could continue this so-called „carry trade“ with little risk until 1984. Then things got pretty bad for the hedge funds.

In the mid-1980s, a strong capital outflow from Japan began. Japanese investors exchanged their yen for other currencies to make investments abroad. This led to a downtrend in the USD/JPY currency pair, resulting in significant losses for hedge funds. This trend ended in 1995.

First double bottom at 80 US dollars, … The low point was formed at 80 yen per US dollar. In the above chart, we see a pronounced sideways trend between 80 and 120 since 1995. The low point at 80 was reached again in 2011. After a 2-year sideways trend at the lowest price level, the yen weakened significantly and an upward movement led the currency pair up by 4,500 pips. USD/JPY rose to a high of 125. From there, a slow and steady downward correction began along the blue downtrend line inserted in the chart.

Only in 2020 was this finally broken. The green, currently valid support zone was exceeded in a very short time, and the upward movement stopped near the 1998 high – the first bright red resistance zone.

… now double top at 150 US dollars? While we saw a double bottom at 80 yen, the situation is currently reversed. The chart shows a double top, which I have marked in yellow for you. With a double top, there is a possibility of a trend reversal if the steep green uptrend line is broken first. Then the currency pair should fall below the low point between these two high points to turn this double top into a major sell signal.

Conclusion In the new year, the currency pair has rebounded from the green uptrend line and is struggling with the resistance zone between 144.50 and 148.20 points. The movement could continue upwards until 150 yen per US dollar. There, you will find the red downtrend line.

This range could be a good opportunity to enter a short position if the currency pair shows weakness in the daily chart. On the other hand, a breakthrough has the potential to lead the currency pair up another 600 to 1,000 pips. For now, this is where the next important resistance zone is located, which you can see as the upper bright red area inserted in the chart.

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