13 Jul 2023

Countering long-standing market consensus, the Bank of Japan could remain cautious, maintaining its ultra-accommodative policy stance in the face of quickening domestic inflation. A renewed rise in energy prices might generate a negative currency shock via a renewed deterioration in the country’s flow dynamics. Alternatively, an extended run of stronger-than-expected global activity data – potentially paired with persistently-sticky inflation – could lead to a widening in interest rate differentials (although we note that the likely negative implications for global growth and risk appetite could act to limit the extent of any yen weakness in markets). World industrial indicators and Japanese...

In our view, a bullish scenario for the yen (against the dollar and other majors) might unfold if the developing global economic downturn becomes more pronounced, with the negative feedback loop into markets larger and broader than anticipated. Periods of heightened financial stress are typically supportive for the currency as Japanese investors tend to repatriate capital allocated overseas during market turbulence. Another yen-positive development could emerge if the Bank of Japan surprises and normalises its policy settings more quickly and abruptly than envisaged. We would note that market expectations for a change at any time soon appear low. More assertive...