We have a positive medium-term bias and expect the yen to strengthen over the third quarter and subsequent quarters. We see the currency rising towards 130 by year-end, and into the mid-120’s in a year’s time. This stems from several factors including: (a) Our expectation that the Bank of Japan will embark on a policy normalisation path given the upturn in inflation. Core inflation (all items excluding fresh food and energy) is now running north of 4 percent per annum, the highest since 1981. In our judgment, an ultra-accommodative stance appears untenable, and it seems to be a matter of when, not if, the Bank jettisons its yield curve control or negative interest rate regime. The odds a policy tweak is made as soon as the meeting have picked up. (b) The turnaround in Japan’s trade and balance-of-payments positions and terms-of-trade on the back of the lower oil price; and (c) Slowing global growth and outlook for more bouts of market volatility. This is normally a favourable setting for the Japanese yen.

Core inflation rates, annual % change