Asia FX Outlook: Japan's Rate Hike "Trust Vote" and the Reality of Yuan Strength

JPY | CNY | BoJ | PBOC

Barriers in Asian currency markets are shifting as Japan embraces monetary normalization and China navigates a complex valuation recovery.

JPY: Resilience Despite Debt

Japan‘s economy is defied skeptics in 2025, with the Nikkei 225 outperforming the S&P 500. The Bank of Japan (BoJ) has raised interest rates to a 30-year high, a move interpreted by macro-analysts not as a tightening, but as a “vote of confidence” in the country’s exit from decades of deflation.

Addressing the Debt Concern:

Investors often cite Japans 200% Debt-to-GDP ratio as a systemic risk. However, the structure of this debt mitigates immediate blowout risks:

• Long Duration: The average maturity of Japanese government bonds (JGBs) is over 9 years (compared to ~6 years for the US), meaning rising yields only slowly impact debt servicing costs.
• Nominal Growth: Japans nominal GDP is finally growing (~3.1%), helping the debt ratio contract from its 2022 peak of 212%.

CNY: It's Not Just Year-End Selling

The Chinese Yuan (CNY) has rallied significantly since October, a move often attributed to exporters selling dollars for year-end settlements (“The Settlement Wave”). However, new data challenges this conventional wisdom.

Shenwan Hongyuan Analysis:

• Declining Settlement Rates: Bank settlement rates actually dropped in Oct-Nov (from 63% to 52%), indicating exporters were not aggressively selling USD.
• The Real Driver: The appreciation has been driven by the PBOCs Counter-Cyclical Factor and broad USD weakness, rather than corporate flows.
• Outlook: As we approach January, actual trade settlement demand may finally kick in (delayed effect), potentially providing a secondary floor for the CNY, provided the USD does not stage a sharp reversal on Fed repricing.