USD/JPY could struggle to get meaningful traction to the downside in the near-term – SocGen

USD/JPY retreats below 147.50 as the Bank of Japan continues its loose monetary policy. Economists at Société Générale analyze the pair’s outlook.

USD/JPY gains overdone relative to 2y UST/JGB spread

The BoJ predictably left all policy settings on hold this morning and Governor Ueda stayed vague on the likelihood of possible adjustments in policy at upcoming meetings, referring to upcoming wage negotiations and pointing to the Nikkei for optimism about the economy. How far or how close the economy is to reaching the 2% inflation target sustainably remains a mystery and keeps markets guessing whether and how soon the central bank will lift interest from negative territory in the new fiscal year (April?).

USD/JPY is expensive based and should realign lower to adjust with 2y and 10y bond spreads. But it takes two to tango beyond the short term. If incoming US economic data keeps deviating to the upsides and the Fed isn't going to budge on interest rates until in 2Q, then USD/JPY will struggle to get meaningful traction to the downside in the near-term.