Rabobank’s Senior FX Strategist Jane Foley argues that earlier assumptions about Prime Minister Takaichi’s fiscal and monetary stance are being reassessed, reducing pressure on the Bank of Japan to stay ultra‑dovish. Combined with rising JGB yields, improving foreign demand and expectations of further BoJ rate hikes, Rabobank’s FX team maintains a 12‑month USD/JPY forecast at 145, implying a gradual Japanese Yen recovery.

Repricing Takaichi trade and BoJ path

"When Takaichi won the LDP leadership election in early October last year, USD/JPY gapped higher. The currency pair had closed the previous week around 147.70 and on the Monday morning, it opened in the 149.11 area. From then until the end of last month, the currency pair trended higher, driven by the so called ‘Takaichi trade.’ Finally the market appears ready to re-visit the assumptions upon which this trade was based. We retain a 12-month forecast of USD/JPY 145 and we explain the reasons behind this forecast below."

"Nevertheless, in an environment in which the US President had repeatedly criticised the Fed for not cutting rates, speculators were happy to assume that Takaichi would underpin the JPY’s status as a funding currency for carry trades by leaning on the BoJ not to hike rates. This assumption had faded by the end of last year when the BoJ did raise rates. BoJ Governor Ueda has subsequently maintained a hawkish tone."

"Against this backdrop the BoJ is allowing its balance sheet and long-term interest rates to normalise. In March 2024, the BoJ changed its policy framework."

"From March 2024, policy has again been focused on short-term rates as the primary policy tool, with the intention that the level of long-term interest rates should be guided by markets. Initially the BoJ planned to slow its monthly purchases by an additional JPY 400 bln each quarter from July 2024."

"In our view, these factors combined with the likelihood of more BoJ rate hikes this year set the scene for a move by USD/JPY back to the 145 area on a 12-month view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)