MUFG’s Senior Currency Analyst Michael Wan notes that the US Dollar weakened, with USD/JPY dropping below 156 and expected further downside over time. The outlook is tied to potential Bank of Japan rate hikes and Japan’s fiscal sustainability focus. Broader Dollar weakness is also linked to Chinese regulators’ stance on US Treasuries.

Dollar slide highlights Yen sensitivity

"USD/JPY in particular fell below the 156 handle at one point. This had a positive spillover impact to Asian currencies in our region which are sensitive to JPY movements, including KRW, SGD, THB, and to a smaller extent the likes of TWD and PHP."

"Moving forward, our global team has kept their expectations for USD/JPY to move down below the 150 level over time, with an expectation for the Bank of Japan to potentially hike rates in the April meeting and with fiscal sustainability also key here."

"The key drivers of Dollar weakness include a commitment by Japan’s Prime Minister Takaichi on fiscal sustainability, coupled with news that Chinese regulators are advising financial institutions to rein in their holdings of US Treasuries."

"In particular, PM Takaichi acknowledge concerns among investors over the plan to cut the sales tax on food items for two years, while reiterating plans to avoid issuing bonds to fund the measure."

"Overall, she said the key is to also steadily reduce Japan’s debt-to-GDP ratio, look for other venue streams or savings including revision of subsidies and tax exemptions, while also ultimately move towards longer-term system of supports such as tax credit and cash handouts that would increase household take-home pay to combat inflation pressures."

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