Despite the elevated geopolitical risks that in times gone past might have lifted the yen some factors have prevailed that economists at MUFG Bank believe will continue to prevail and help lift USD/JPY further over the short-term.
Compelling reasons for the yen to remain on a weak footing:
“The technical backdrop is very much favoring USD/JPY higher. We have cited the big technical resistance from the long-term downtrend from the highs in 1990 and again in 2015 that could prove strong resistance. That level came in at around 117 and the clear break of that level and the momentum is very much supportive for USD/JPY. This technical break should open up a move to the 120-level.”
“We expect the Fed to signal more monetary tightening than signaled in December (6 hikes versus 3 in Dec) which will help keep USD/JPY underpinned for now.”
“Japan’s trade position is set to deteriorate further. Energy imports make up close to 25% of total imports and the price increases in global markets for crude oil will equate into a larger trade deficit over the coming months.”
“There is increased anticipation that the profound change in the global inflation outlook will trigger a fundamental shift in Japan with the ‘deflation mindset’ often referred to be Governor Kuroda being altered. With the BoJ signaling no change in the monetary policy any time soon, this could mean a decline in real yields in Japan, thus helping to fuel further yen depreciation.”
The Japanese yen has fallen 2.5% against the US dollar so far this year, with the bulk of the decline coming in the wake of Russia’s invasion of Ukraine. Beyond the clear USD advantage from nominal yield spreads, JPY faces other challenges. Subsequently, economists at Scotiabank expect the US/JPY to edge higher towards 120 in 2023.
JPY remains prone to weakness:
“Rising US yields will likely draw more flows to US Treasury product from Japanese investors and support USD gains versus the JPY.”
“Aside from the direct implications of the war in Ukraine, we think that the risk of tenser China/Taiwan relations represents another potential headwind for the JPY in the future.”
“We are forecasting USD/JPY ending this year at 118 and 120 in 2023 (compared with Bloomberg consensus estimates of 116 and 115 respectively). The risk to our forecast is clearly to the upside in the near to medium-term”
“The USD is looking overbought in the short run but we expect solid support on minor USD/JPY dips to the mid-116s and unless there is a clear reversal in the recent USD gains shortly, we think USD gains mean the technical path for the USD to push on towards 125 is becoming clearer.”
USD/JPY Long (Buy)
Enter at: 118.464