Japanese Yen: Turning point with BoJ shift – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong argue that intervention risks and a more hawkish Bank of Japan (BoJ) are key for the Japanese Yen (JPY). They see faster BoJ policy tightening gradually supporting JPY and increasing the likelihood that USD/JPY ends the year closer to 150–155, rather than its current 160 forecast, even as thinner holiday liquidity raises near-term volatility risks.

BoJ tightening to bolster Japanese Yen

"USD/JPY has rebounded above 157 after briefly slipping below that level following reports of a BoJ rate check last week. Intervention risks have risen again and should help limit excessive JPY weakness. With Japanese markets closed today and tomorrow for public holidays, thinner market liquidity could also lead to greater JPY volatility."

"The BoJ's 7-2 vote split in favour of a rate hike may remain a near-term headwind for the JPY. However, the more important takeaway is that the BoJ appears increasingly willing to tighten policy at a faster pace. This shift should ease concerns that the BoJ is falling behind the curve."

"Over time, that should provide stronger support for the JPY. Previously, fears that the BoJ was behind the curve weakened the relationship between USDJPY and US-Japan yield differentials."

"Taken together, these developments increase the likelihood that USD/JPY ends the year closer to 150-155 rather than our current forecast of 160. Should the JPY strengthen, the low-yielding CHF is likely to remain the preferred funding currency. This view is reinforced by our expectation that the SNB keeps policy rates at 0% through at least yearend."

"Progress in channelling domestic savings into Japanese assets has been limited so far, although we expect further policy initiatives to support this objective."

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