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Japanese Yen to Resume Bearish Trend Amid Deviation in Policy Outlook

Japanese Yen to Resume Bearish Trend Amid Deviation in Policy Outlook

David Song, Strategist
Japanese_Yen_to_Resume_Bearish_Trend_Amid_Deviation_in_Policy_Outlook_body_Picture_1.png, Japanese Yen to Resume Bearish Trend Amid Deviation in Policy Outlook

Japanese Yen to Resume Bearish Trend Amid Deviation in Policy Outlook

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen weakened against its U.S. counterpart as the Federal Open Market Committee (FOMC) showed a greater willingness to taper its quantitative easing program, and the USDJPY looks poised to resume the bullish trend from earlier this year amid the deviation in the policy outlook. Indeed, it seems as though the Fed is slowly moving away from its easing cycle as Chairman Ben Bernanke sees scope to ‘moderate the pace of purchases later this year,’ while the Bank of Japan (BoJ) may come under increased pressure to further support the ailing economy as Prime Minister Shinzo Abe delays his ‘third arrow’ growth strategy.

Indeed, Moody’s Investor Services warned that the new government’s plan may have a limited impact in encourage economic activity as it fails to boost private fixed capital formation, while Standard & Poor’s encouraged the BoJ to purchase more risk-assets in an effort to encourage a stronger recovery. As the economic docket is expected to show the headline reading for Japanese inflation contracting an annualized 0.4% in May, the persistent weakness in price growth may encourage the BoJ to provide additional monetary support at the July 11 meeting, and we should see the central bank continue to embark on its easing cycle in the second-half of the year as Governor Haruhiko Kuroda pledges to achieve the 2% target. As the governor is scheduled to speak next week, we should see Mr. Kuroda continue to strike a highly dovish tone for monetary policy, and the fresh batch of central bank rhetoric produce a further decline in the Yen should we see talks of more easing. However, there appears to be a growing rift within the central bank as the board continues to assess its impact on the real economy, and we may see a growing number of BoJ officials favor a neutral policy stance for the summer months amid the increased volatility in the Japanese financial market.

As the USDJPY carves out a higher low in June, we should see the pair retrace the decline carried over from the previous month, and the dollar-yen looks poised to mark a higher high given the policy outlook for the Fed and the BoJ. In turn, we will retain our game plan to buy dips in the USDJPY, and we may see a more meaningful run at the 104.00 handle in the days ahead as we anticipate the BoJ to further embark on its easing cycle. - DS

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