JPY: Room for further JPY strength even if BoJ expresses more caution – MUFG

The tentative improvement in global investor risk sentiment contributed to the underperformance of the yen over the past week alongside the other traditional safe haven currency of the Swiss franc. It has resulted in USD/JPY rising back up to the 144.00-level after briefly falling below the 140.00-level at the start of last week. The weaker yen and improving risk sentiment have helped to fully reverse 'Liberation Day' losses (~15%) for the Japanese Topix equity index overnight, MUFG's FX analyst Lee Hardman notes.

Yen weakens amid improving risk sentiment

"The main event for the yen this week will be the BoJ’s latest policy meeting. It will be the first policy update since President Trump’s 'Liberation Day' tariffs announcement. The BoJ will have to take into account the negative impact of trade disruption when they set monetary policy in the week ahead. At the previous policy meeting in March, the BoJ had already expressed caution when Governor Ueda stated that 'it is not easy to make a judgement' on whether they are getting closer to their goal given high uncertainty surrounding trade and other policies from overseas while indicating he hoped things would become a clearer at the beginning of April."

"The significant upside surprise from the Tokyo CPI report for April was supportive for further policy normalization in Japan. However, trade disruption will discourage the BoJ from hiking rates further in the near-term. A quick trade agreement between the US and Japan to reverse tariff hikes could give the BoJ more confidence to hike rates further but that appears unlikely until later this year. The Japanese rate market has already pushed back expectations for the timing of the next BoJ hike from June-July to September-December."

"Overall, the developments do not change our view that the JPY is likely to strengthen further alongside slowing global growth which will encourage other major central banks including the Fed to deliver deeper rate cuts that continue to narrow yield differentials with Japan. Over the past week officials from the BoE, ECB and Fed have all indicated that they are ready to lower rates in response to evidence of weakening economic growth in the coming months."