While yield spreads in absolute terms look set to remain skewed against the yen for some time, we believe the bulk of the adjustment has played out. The balance of probabilities is tilted toward differentials narrowing and the yen recovering further. As other central banks, such as the Federal Reserve, European Central Bank, and Bank of England, contemplate a policy easing cycle, the Bank of Japan appears set to embark on a normalisation path. Modest tweaks, such as the formal ending of yield curve control, may well see markets discount larger steps further out. We are projecting the yen to drift down to 140 in first quarter, before moving towards 130 by end-2024. Our bullish bias also means that following a torrid spell we expect the yen to outperform on the crosses.

USDJPY and US-Japan yield spreads