Why is the yen so strong at the beginning of the year? In addition to interest rate hikes, there are also expectations for "Plaza Accord 2.0."

Since 2025, the Japanese yen has risen about 3% against the US dollar, becoming the best-performing currency among G10 currencies.

In a research report released on February 12, UBS analysts Shahab Jalinoos and others stated that the yen has performed strongly this year, with the underlying factors being the rise in Japanese interest rates and the market's increasing expectations for "Plaza Accord 2.0."

Regarding interest rates, the report shows that since the beginning of this year, the yield on Japan's 10-year government bonds has risen by more than 20 basis points, reaching the highest level since 2011, while the yield on US 10-year government bonds has remained roughly flat compared to the end of 2024, with the widening US-Japan interest rate differential continuing to support the rise of the yen.

Secondly, the Bank of Japan has previously made it clear that as long as domestic wages remain at a level it deems appropriate, it may raise interest rates again this year, even in the face of tariff risks similar to those faced by other parts of the world.

In addition to interest rate factors, the market also holds expectations for a possible "Plaza Accord 2.0."

In the Plaza Accord of 1985, the United States coordinated actions with its major trading partners to successfully promote the depreciation of the dollar, and by the end of the 20th century, the dollar index had nearly halved from its peak in 1985.

As exchange rate issues have become one of the risks for the new Trump administration, and with 2025 marking the 40th anniversary of the signing of the "Plaza Accord," some speculate that if Trump intends to initiate "Plaza Accord 2.0," Japan is likely to be the preferred target.

The report explains that this is mainly because Japan's real interest rates remain at extremely low levels, and the yen is widely considered to be undervalued.

Although last week's meeting between Trump and Japanese Prime Minister Shigeru Ishiba did not yield any information in this regard, UBS stated that the market may continue to hold this hope in the coming months and remain optimistic about the yen.

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