The Japanese Yen Outlook: USD/JPY Scans 130 Ahead of Fed
The Japanese Yen Outlook: USD/JPY Scans 130 Ahead of Fed
Ahead of the Federal Reserve’s interest rate decision this week, the Japanese yen is trading higher on the hopes that the Bank of Japan will soon abandon its ultra-accommodative monetary policy. The central bank, known as the BoJ, surprised market participants last month by widening its band of yield curve control, which is an important indicator of where the BoJ may eventually move in terms of monetary policy.
The yen also benefited from stronger global demand and a weaker US dollar this year. It surged above the Y=120:US$1 exchange rate, which is seen as a strong resistance line in foreign-exchange markets, in March.
However, the yen has since been weighed down by the ongoing Russia-Ukraine conflict, which is denting economic growth in Japan and affecting exports to Europe, where prices are rising as a result of production disruptions from Russian sanctions and the war. The yen’s weakness is expected to persist into 2022, and could crimp Japan Inc.’s growth this year through a combination of increased inflation, softer consumer spending and delayed business investment.
USD/JPY forecasts by analysts
ING, Citibank and the National Australia Bank believe that the yen will continue to weaken against the US dollar this year. They expect the yen to reach a level of 1.20:US$1 by mid-2022, before falling back to 114 by the end of the year.
While the yen is weaker against most other currencies, it still trades above its long-term average against the greenback, and its recent gains are a welcome boost for investors in riskier currency pairs. The yen has appreciated more than 0.6% against the Canadian dollar, Norwegian krone and Australian dollar this week.
The yen’s recent rally is a huge turnaround from September when hedge funds were rushing to sell due to a divergence in interest rates between the hawkish Federal Reserve and dovish BOJ. The IGCS shows that retail traders are net short on the pair, with 57% of traders currently holding short positions (as of this writing).
Although the yen’s recent gains are likely to continue to strengthen, they won’t be enough to reverse the yen’s depreciation this year, which will largely come from a combination of sluggish global economic growth and rising input costs for companies in Japan. The Russia-Ukraine conflict is expected to add further challenges to boosting Japanese exports this year, while international trade and financial sanctions on Russia and production disruptions in Ukraine will dampen supply chains.
The yen is a key metric for the economy and will play an important role in determining whether the Japanese economy continues to grow in 2022. A weaker yen will bolster the export sector and help to offset a weaker domestic economy, but it won’t do much to support domestic consumption. The yen’s continued weakness will also hinder business confidence, as manufacturers will find it hard to raise their output levels without access to a weaker currency to compensate for rising input costs.