JPY: Still bearish despite potential BOJ adjustment - BNPP

Clara Leonard, FX Strategist at BNP Paribas, suggests that their economists have changed their forecast for Bank of Japan (BoJ) monetary policy in 2017, and now expect the central bank to allow the 10-year JGB yield to rise to 30bp in October from its current 0% operational target.

Key Quotes

“Despite this shift, bearish JPY remains one of our highest conviction views for 2017 and we continue to target USDJPY at 128 by the year end. This is our top trade idea for 2017. This above consensus forecast is based on our expectation for significant monetary policy and real yield divergence between the US and Japan, and real yields differentials to move against the JPY even with a shift in BoJ policy.”

“Our economists note that Japan core CPI inflation should top 1% by Q3, boosted by a weaker JPY and stronger oil price. In Q3 17, the significant JPY depreciation we forecast could start impacting monetary policy decisions. With a limited rise in nominal income, real income could be negatively impacted as yen depreciation pushes up import prices, potentially resulting in a change in the BoJ policy.”

“Despite the modest expected upwards adjustment in the 10y target rate, we have not changed our forecasts for a weaker JPY in 2017 and 2018. We already assumed a slowing pace of JPY depreciation to account for the risk that the Japanese authorities (and US authorities) could become less comfortable with the continuing yen decline beyond last year’s USDJPY highs. As a result, the pace of the rise in USDJPY in our forecasts slows between Q3 and Q4 2017; we expect the pair to rise from 115 to 125 between Q1 and Q3 and a slower rise from 125 to 128 in Q4.”