JPY

It was one-way traffic for the Japanese yen in the back end of the second quarter. The currency depreciated sharply against a range of other majors, with the US dollar touching a 7-month high, the Australian dollar hovering around the top end of its 9-month range, and the euro hitting its highest level since the third quarter of 2008. Markets were clearly underwhelmed by the lack of action at the late-April Bank of Japan meeting, the first for newly-appointed Governor Ueda. Over the same period interest rate expectations for other major central banks like the Reserve Bank of Australia, Bank...

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...

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...