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25 May 2015
USD/JPY seen at 140 by 2016 – Capital Economics
FXStreet (Barcelona) - Julian Jessop of Capital Economics, forecasts USD/JPY to move higher towards 140 levels by 2016, further explaining the key reasons and the risks for the bullish view.
Key Quotes
“The yen’s break of 120 against the dollar in the past week has refocused attention on the pair after several months of stability. We continue to expect the Japanese currency to weaken to 140 by the end of 2016.”
“The yen has, of course, already fallen a long way following the election of PM Abe’s government in 2012, driven largely by the policy of quantitative and qualitative easing (QQE) adopted by the Bank of Japan. As a result, the nominal exchange rate has returned to the levels seen in the middle of the last decade. What’s more, Japan’s low wage and price inflation compared to its competitors over this period means that the currency now appears heavily under-valued in real terms.”
“Nonetheless, history shows how exchange rates can differ from “fair value” (or what competitors might like) for many years. In the case of Japan, we would argue that the currency needs to be significantly under-valued to support growth, lift inflation and restore the public finances to a safer path. What’s more, we expect divergences in monetary policy and in bond yields to help to deliver this outcome.”
“The relationship between US-Japan yield differentials and the yen-dollar exchange rate is usually strong, even though it has recently been trumped by the BoJ’s decision (last October) to expand QQE.”
“Looking ahead, we expect yield differentials to shoot out again as the Fed starts to return US interest rates towards more normal levels more aggressively than the markets currently anticipate. More importantly, we expect the BoJ to announce a further extension of QQE, perhaps as soon as October this year.”
“The main upside risk to the yen is probably a surge in safe-haven demand, led by repatriation flows, perhaps triggered by an escalation of the Greek crisis. However, we would expect the Bank of Japan to respond to any renewed currency strength with an even bolder loosening of monetary policy.”
Key Quotes
“The yen’s break of 120 against the dollar in the past week has refocused attention on the pair after several months of stability. We continue to expect the Japanese currency to weaken to 140 by the end of 2016.”
“The yen has, of course, already fallen a long way following the election of PM Abe’s government in 2012, driven largely by the policy of quantitative and qualitative easing (QQE) adopted by the Bank of Japan. As a result, the nominal exchange rate has returned to the levels seen in the middle of the last decade. What’s more, Japan’s low wage and price inflation compared to its competitors over this period means that the currency now appears heavily under-valued in real terms.”
“Nonetheless, history shows how exchange rates can differ from “fair value” (or what competitors might like) for many years. In the case of Japan, we would argue that the currency needs to be significantly under-valued to support growth, lift inflation and restore the public finances to a safer path. What’s more, we expect divergences in monetary policy and in bond yields to help to deliver this outcome.”
“The relationship between US-Japan yield differentials and the yen-dollar exchange rate is usually strong, even though it has recently been trumped by the BoJ’s decision (last October) to expand QQE.”
“Looking ahead, we expect yield differentials to shoot out again as the Fed starts to return US interest rates towards more normal levels more aggressively than the markets currently anticipate. More importantly, we expect the BoJ to announce a further extension of QQE, perhaps as soon as October this year.”
“The main upside risk to the yen is probably a surge in safe-haven demand, led by repatriation flows, perhaps triggered by an escalation of the Greek crisis. However, we would expect the Bank of Japan to respond to any renewed currency strength with an even bolder loosening of monetary policy.”