The Japanese Yen (JPY) has demonstrated relative stability today, mirroring the limited movements in the broader foreign exchange (FX) markets. MUFG Bank economists delve into the outlook for USD/JPY, examining the factors influencing the currency pair’s trajectory.
The recent Tokyo inflation data has raised eyebrows, revealing a notable drop in the year-on-year rate from 2.4% in December to 1.6% in January. The core-core rate experienced a similar decline, falling from 3.5% to 3.1%. These decreases, exceeding expectations by 0.4 and 0.3 percentage points respectively, may cast doubt on the Bank of Japan‘s (BoJ) potential plans to raise the key policy rate come April. Despite these challenges, MUFG Bank points out that base effects should offer some support, with inflation likely to remain higher in the coming months, partially due to gas and electricity subsidies introduced in Q1 2023 that had previously contributed to suppressing inflation.
MUFG Bank maintains a near-term bias for the US Dollar to strengthen, and in light of the larger-than-anticipated decline in the inflation data, suggests the possibility of increased appetite for Yen-funded carry positions. This scenario could potentially contribute to a further ascent in USD/JPY.
The economists acknowledge that April appears distant enough to discourage immediate Yen selling. However, they caution that if the spot rate continues to drift higher, reaching the 150.00 level, the threat of intervention may gradually escalate. As market dynamics evolve, MUFG Bank keeps a watchful eye on potential shifts in USD/JPY, emphasizing the delicate balance between economic factors and intervention concerns.
