JPY

Research evidence excerpt

JPY

bruary, the US–Japan spread narrowed

with last November when we set the 164 target, the rel-

as JPY rates rose, but this did not translate into a decline

ative monetary-policy outlook suggests that upside

in USD/JPY. We think this is because the market viewed

risks to USD/JPY have increased. Last November, our

the then-rising expectations for BoJ rate hikes as implying

expectation for USD/JPY to rise was based primarily on

that, under pressure from the Takaichi administration, the

the view that the policy mix promoted by the Takaichi

BoJ would end up behind the curve and ultimately be

administration (expansionary fiscal policy and pressure on

forced to deliver substantial rate hikes to contain JPY

the BoJ) would materially increase the risks of upside

depreciation at some point in the future. By contrast, since

inflation surprises in Japan and JPY depreciation. In other

March this year, in episodes when the US–Japan rate dif-

words, our outlook at that time was essentially driven by a

ferential has widened on the back of rising expectations

bearish JPY view, and we were in fact relatively bearish

for Fed rate hikes, USD/JPY has moved higher. Accord-

on the USD’s broader trend. By contrast, while our bear-

ingly, if the US–Japan spread widens further going for-

ish view on the JPY remains unchanged, we have turned

ward—driven by an increase in expectations for Fed rate

broadly bullish on the USD, increasing the likelihood that

hikes—we think it is likely to provide support for USD/

the combination of a stronger dollar and a weaker yen will

JPY. Given that USD strength appears to have paused

push USD/JPY higher. There is an empirical rule of

recently following dovish remarks by Chair Warsh and a

thumb that USD/JPY rises by an average of 4.5% in