Market participants who held onto the Japanese Yen (JPY) were probably glad to see the end of the year, once again. The Yen managed to gain ground against the weak US dollar in 2025 by a small margin. After a very weak second half of the year (approximately -7.5% vs the G10 average), it was uncertain whether the Yen would be the second-worst performing G10 currency, Commerzbank's FX analyst Michael Pfister notes.

JPY faces pressure from fiscal concerns and China tensions

"In December, the familiar pattern resumed, with the Japanese finance minister emphasizing that Japan has a 'free hand' to take bold action against currency movements that do not align with the fundamentals. As soon as the Yen depreciates more strongly, such discussions arise. However, it usually takes a few weeks of increasingly heated rhetoric before actual intervention takes place, and it does not look as if the Yen will continue to depreciate."

"The question arises of what constitutes a JPY movement that is not in line with the fundamentals. At the end of the year, the Yen was affected by two factors: a larger-than-expected fiscal package raised concerns about the sustainability of public finances, as did an escalating conflict with China. Officials there are upset about statements made by the Japanese prime minister regarding Taiwan. These statements were not new, merely reiterating earlier ones. Nevertheless, China currently seems to be on the path to escalation. This week, it was announced that China had imposed export controls on dual-use goods to Japan. At a time when the Japanese real economy is struggling, this is another setback."

"It is currently difficult to predict when the conflict with China will cool down again, and when the Yen will recover. It is also hard to envisage developments in Japan shaking off the conflict. This morning's disappointing wage data makes further interest rate hikes even less likely. For those hoping for a significant appreciation of the JPY, the only option for now is to wait for the conflict with China to cool down again. They must also hope that the conflict does not escalate further. After all, the Chinese government could further escalate the conflict with a complete export ban on rare earths, which would deal a significant blow to the Yen."