Outlook

In our opinion, relative interest rate differentials should continue to shift incrementally in the yen’s favour over the next year. While central banks appear set to maintain restrictive policy settings to ensure inflation is tamed, we doubt further interest rate hikes will be delivered. Indeed, with central banks evolving toward a more data-dependent and risk management-focused approach as growth slows, labour markets loosen, and inflation moderates, expectations about the next easing cycle should intensify. This is likely to see bond yields outside of Japan decline as in past cycles, when rates have fallen once it became clear the monetary tightening...

A more bearish backdrop for the yen might unfold if the Bank of Japan holds firm, ignoring elevated inflation and indications that price growth could persist. In this scenario, wide interest rate differentials should continue to depress the yen: especially if risk sentiment remains buoyant, inflation cools, and global growth slows whilst avoiding more sinister outcomes. USDJPY and Japan Trade-Weighted Index