2023.05.22 2023.05.22
Yen is a time bomb. Forecast as of 22.05.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
If monetary policy is normalized ahead of time, the cost of a mistake will be too high. This is the main argument of the Bank of Japan in favor of its own passivity. However, is it really so? Let us discuss the Forex outlook and make up a USDJPY trading plan.
Weekly yen fundamental forecast
Despite Japan’s strong domestic data, new BoJ governor Kazuo Ueda’s commitment to ultra-easy monetary policy has made the yen a G10 outsider. Since the beginning of the year, it has lost more than 5% of its value against the US dollar. Things are worse only for the Norwegian krone.
In fact, the Japanese yen has quite a lot of advantages. In 2022, one of the yen weakening drivers was high energy prices, which worsened the current account. However the situation has changed in 2023. The drop in prices of oil, gas and other commodities favorably affected imports. In April, Japan’s imports decreased for the first time since January 2021. As a result, amid a rise in exports, the country’s foreign trade improved by 2.6%.
Dynamics of Japan’s imports
Source: Bloomberg.
Ultra-easy monetary policy, Japan’s exit from the recession that took place in the third and fourth quarters, positive changes in consumer prices and good corporate incomes lead to the rapid growth of local stock indices. TOPIX has climbed to the top since 1990, the Nikkei 225 has gained over 19% since the start of the year. The capital inflow into the stock market, in theory, should help strengthen the local currency.
Finally, the acceleration of consumer prices from 3.1% to 3.4% in April and a rise in core inflation to 4.1%, the highest since 1981, leaves no chance on paper for the Bank of Japan. The regulator will have to make adjustments to the ultra-easy monetary policy. The talks about the BoJ monetary normalization is a bearish factor for USDJPY. However, the pair is trading up.
Dynamics of Japan’s inflation
Source: Reuters.
The reason is Kazuo Ueda’s unwillingness to make any adjustments to the BoJ monetary policy. The central bank’s governor believes that the rise in consumer prices results from the growth of costs. If the monetary policy is being normalized too early, the mistake will cost a lot.
Thus, the yen is a time bomb. Positive shifts in the economy do not support the currency due to the reluctance of the central bank to get rid of monetary stimulus. This allows BNY Mellon and AVM Capital to forecast USDJPY to rise to 140 by the end of the second quarter. However, sooner or later, the Japanese yen will rise. Thus, Goldman Sachs and Barclays predict the adjustment of the BoJ monetary policy in July. If they turn out to be right, the USDJPY trend should turn down.
Weekly USDJPY trading plan
Besides, the US dollar has strengthened as investors abandoned the idea of the Fed’s dovish shift and Treasury yields have been up. At the same time, Jerome Powell’s hints at a pause in the monetary tightening cycle in June and the uncertainty around the debt ceiling may press down the greenback. In this regard, USDJPY could start trading flat, and one should gradually exit the longs entered earlier. It is also worth considering the possibility of short-term sales in case the pair fails to return above 138.4.
Price chart of USDJPY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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