Japanese yen: longer-term weakness still expected

Near-term, potential risk-off sentiment from possible geopolitical events (particularly in Europe and Asia) would likely strengthen the JPY.

 

Several factors could however weaken the JPY over the 12-month horizon. These include central bank policy divergence, as rising US policy rates is likely push US Treasury Yields higher, while BoJ holds 10y yields at ~0%.

 

Meanwhile, Bank of Japan (BoJ) should keep its easing stance for now, but could move to a more neutral approach later this year. The BoJ remains committed to its yield curve management in order to increase inflation and intervened heavily into the market by using price tenders recently. Inflation retreated (due to base effects) to 0.3% YoY in February, but it should increase gradually further towards 0.6%. BoJ’s maintenance of loose-to-neutral policies, coupled with a hawkish Fed could weaken the JPY.

 

Our base case also assumes that event risks dissipate over course of the year. 

Chart source: Bloomberg Finance LP,  Deutsche Bank Wealth Management. Data as of April 18, 2017.

Tuan Huynh

CIO APAC and Head of DPM APAC

Source: CIO Bulletin, April 18, 2017