The dollar/yen pair breached 150 in October 2022, marking a 32-year low. This was largely due to Japan’s yawning trade deficit and the Bank of Japan’s (BoJ) dovish stance. While the Japanese yen closed out 2022 almost 18% down versus the dollar, J.P. Morgan Research has been expecting it to strengthen in 2023.
“A decline in long-end U.S. yields and a peaking out in terminal rate expectations into 2023, alongside the risk of a moderate U.S. recession, should clear the runway for a lower repricing of the dollar/yen pair in 2023,” said Benjamin Shatil, Head of Japan FX Research at J.P. Morgan. In addition, the BoJ shocked markets in December by relaxing its yield curve control (YCC) policy of pinning yields close to zero. This move was in line with the J.P. Morgan Research view, but the timing was earlier than expected. The central bank announced it would allow 10-year Japanese yields to climb as high as 0.5 percent, compared with 0.25 percent previously. The yen strengthened against the dollar after the news.
“What has changed for the yen has been the earlier-than-expected BoJ pivot. Our baseline macro view now looks for a further relaxation of YCC later this year, which would form an additional bullish tailwind for the yen,” said Shatil.
Though this would mark a major change for BoJ policy, other tweaks may also prove supportive for the currency. These include a further revision higher of the central bank’s core CPI forecasts and a change to the extant forward guidance (official communication that signals to the public the likely future path of monetary policy). All in all, J.P. Morgan Research expects the dollar/yen pair to trade at 128 by December 2023.
