USD/JPY to advance nicely as BoJ stands alone in the dovish camp – Citibank

As economists at Citibank note, the Bank of Japan (BoJ) is one of the last bastions of central bank dovishness. Subsequently, the Japanese yen is set to depreciate against both the US dollar and the euro.

Japanese political considerations to place limits on the extent of yen weakness

“We do not expect BoJ to review its policy parameters (YCC and cash target) anytime soon and not until after Governor Kuroda’s term in the BoJ expires in April 2023. This should retain yen’s bias to weaken against both USD and EUR.”

“The Japanese still retain USD denominated assets but we also note the rising cost of FX funding for JPY-denominated investors buying US paper following the re-pricing of the FOMC outlook. This creates more of an incentive for JPY-denominated investors to take the FX risk when buying USD assets which could potentially add to the upward bias in USD/JPY (and EUR/JPY).”

“PM Kishida is known to be less keen on a weaker yen than his predecessors. And given the rising price of imported crude oil, the new PM may begin to sense some need for correcting JPY’s depreciation as one way to shore up longer-term support for his administration. But this would probably argue more for a limit to the extent of yen weakness (to the 118.00 area) than an outrightly stronger JPY.”

See: USD/JPY should trade at 117.50, bullish bias over the coming weeks – Credit Agricole