JPY strength could take time to reverse

Based on monetary policy alone, the JPY should weaken against the USD – but other factors are in play too.

As the USD weakens, the Japanese yen (JPY) has continued to strengthen against it. USDJPY is now testing 110 levels, having been at 114 as recently as July 10. Meanwhile the dollar index (DXY), a measure of overall USD strength, has fallen to its lowest levels since May 2016.

In the near term, JPY resilience is likely to continue. Markets appear unconcerned about varying central bank dynamics and yield differentials at the moment, focusing instead on developments in the US.

On the basis of monetary policy differences alone, the JPY should weaken and underperform compared to the USD and the EUR. The Bank of Japan will likely be the last to remove its accommodative stance, lagging behind the US Fed and the European Central Bank.  

“Inflation dynamics are also different, with Japanese inflation still muted at the moment, compared to the US and Eurozone.”


Headline inflation is at 0.4% YoY in Japan, versus 1.6% in the US and 1.3% in Eurozone. Moreover, core inflation in Japan remains muted, at 0% excluding food and energy and the Bank of Japan again revised down its inflation forecasts in July. The risk is that it takes its inflation forecasts down every further in coming months, further delaying the scaling back of its currently very accommodative monetary policy.

All these factors should tend to weaken the JPY over the longer term and we maintain our forecast of USDJPY at 115 in June 2018, implying a marked depreciation in the currency from current levels. However, the reversal in JPY strength could take some time, if US developments boost risk-off demand for the currency.

Source:  Bloomberg Finance L P, Deutsche Bank AG. Data as of Aug 2, 2017.

Tuan Huynh
CIO Asia
Source: CIO Bulletin, Aug 4, 2017