USD/JPY: Extended easy BoJ monetary policy suggests weaker yen ahead

Analysts at CIBC forecast the USD/JPY pair could continue to rise during the next months at a slow pace. They see the pair at 114 during the fourth quarter and at 115 in the first quarter of next year.

Key Quotes:

“While the RBA recently moved away from yield curve control, it seems unlikely that the BoJ is set to follow suit anytime soon. Following a meeting between BoJ Governor Kuroda and PM Kishida, post the recent LDP election victory, the former acknowledged that not only does the bank remain committed to its 2% CPI target, it also will maintain YCC, even beyond Covid. The perpetuation of an ultra-easy BoJ policy stance is set to leave Japan alongside the eurozone and Switzerland as extending long term policy inertia, a scenario which should continue to leave the JPY on the defensive.”

“Post the re-election of the LDP, we can expect another round of fiscal stimulus. Press reports suggest a potential injection of around JPY35trn, which could even include cash handouts to youths and children. While we expect Q3 weakness to give way to a solid rebound in Q4 GDP as the economy re-opens, the extension of yield curve control will see a sizeable widening in USTJGB 10 year spreads, providing the rationale for ongoing outflows of capital looking for higher returns overseas.”

“One risk to our weaker yen scenario that bears watching is the sheer scale of existing JPY shorts. Speculative investors have continued to add to those positions over recent weeks, and leveraged shorts are threating extremes not seen since December 2018. The scale of the position skew risks a JPY corrective rally should risk sentiment prove to become materially compromised into year-end, but we would still maintain our medium term outlook for a weaker yen into 2022.”

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