USD/JPY: Yen to retrace lost ground ahead with markets too eager on Fed action – CIBC

The Japanese yen has depreciated markedly versus the US dollar since the Russian invasion into Ukraine. In the view of economists at CIBC Capital Markets, an unwinding of the aggressive Federal Reserve tightening priced in could cause the yen to retrace lost ground ahead despite the Bank of Japan (BoJ) being a policy laggard.

Yen to regain some of its recent lost ground from here to year-end

“We expect the BoJ to maintain an ultra-easy policy stance into 2023. Although Governor Kuroda anticipates CPI testing the 2% target threshold into April, he does not expect inflation to remain at such levels, even factoring in the surge in energy prices and base effects from lower mobile phone fees dropping out from April. It’s therefore unsurprising that the market is pricing only a 10% risk of a hike by the end of the year.” 

“The combination of widening front-end spreads versus the USD, as the market prices in additional Fed hikes and BoJ inertia, has been favouring near-term USD/JPY gains. But we don't see that momentum extending over our forecast horizon, as the market may soon come to question the pace for US tightening, prompting a correction in recent spread widening.” 

“We look for the yen to regain some its recent lost ground from here to year-end.”