JPY

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...