USD/JPY: Japanese yen on upward trajectory – CIBC

Analysts at CIBC see the Japanese yen moving to the upside versus the US dollar. They forecast USD/JPY at 103 by the end of the fourth quarter and at 101 by the first quarter of next year. 

Key Quotes: 

“We expect the Japanese economy to contract by around 5.5% in calendar year 2020. The modest bounce in the quarterly Tankan business survey from pandemic lows is indicative of a steady, rather than spectacular, rebound into 2021. Overall business confidence remains far below pre-pandemic levels, and business investment intentions remain weak.”

“With the BoJ set to maintain a steady policy bias, an extension of the BoJ special funds operation may be pushed towards year end. It appears increasingly likely that the new Suga-led administration will look to ease fiscal policy.”

“Although we have seen 10 year UST-JGB spreads push wider since troughing at around 50bp in early August, we have yet to see spread moves have a material influence on JPY valuations. There are several key influences at play here. Firstly, the cost of hedging for Japanese investors has diminished sharply as short-term rate differentials have collapsed. Secondly, the destination of bond purchases has changed, away from the US, with Australia proving to be a major beneficiary. Finally, although nominal yield spreads may be widening, when inflation is taken into account, real spreads at both the front and longer ends (2yr and 10yr) have moved sharply into negative territory. Absent real yields spread moving back into positive territory and impacting potential net bond outflows, we maintain USD/JPY downside targets.