The Japanese Yen (JPY) has exhibited a sustained and prolonged weakness, a trend I've highlighted in my previous blogs on ACY.com.au. I now anticipate this downward pressure on the JPY to endure for an extended period beyond my initial projections. Several prevailing factors underpin this viewpoint.

Primarily, Goldman Sachs economists has recently outlined a more dovish trajectory for the Bank of Japan's (BoJ) policy approach from the present juncture. This projection entails a lengthier timeline for the cessation of the negative interest rate policy (NIRP), potentially manifesting around the spring of 2025. In contrast, current market sentiment aligns with an earlier termination, likely in the latter half of 2024. My rationale for this discrepancy lies in my assessment that the BoJ will likely necessitate the intervening period to ascertain the sustainable attainment of its targeted 2% inflation rate. Integral to this appraisal is the requirement for robust wage growth momentum.

Furthermore, my analysis indicates a likelihood of US interest rates persisting at elevated levels for a protracted period, a stance differing from consensus expectations. This assessment derives from Goldman Sachs economists' conviction that the probability of a resurgence in US economic momentum surpasses the potential of a recession. Consequently, my outlook envisions a stabilization of the US federal funds rate within the range of 3% to 3.25%.

The confluence of these factors contributes to the ongoing depreciation of the JPY. Notably, the BoJ's distant positioning from rate hikes and the continual buoyancy in equity markets work in tandem to perpetuate this weakening trend. Additionally, my forward-looking perspective on the Chinese Yuan (CNY) indicates an inclination towards depreciation, adding to the downward trajectory of the JPY.

In light of these considerations, I'm compelled to revise my projections for the USD/JPY exchange rate. Over the forthcoming 3-, 6-, and 12-month periods, I anticipate USD/JPY levels of 150, 155, and 150, respectively. My longer-term outlook, encompassing the conclusion of 2024, 2025, and 2026, posits USD/JPY rates at 135, 125, and 115. This forecast underscores the sustained weakening of the JPY.

It is imperative to acknowledge the inherent risks embedded in this forecast. Foremost among them is the potential for heightened inflation and consequential currency depreciation, which could elicit robust countermeasures such as currency intervention or a preemptive hawkish shift from the BoJ, or possibly both, leading to an altered trajectory for the JPY.

USDJPY Still Have Strength to push it Higher!

Aug 29 2023

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