USD/JPY Eyes Bank of Japan

Japanese Yen Fundamental Forecast: Bearish

  • Japanese Yen outperformed versus G10 peers last week, reversing recent trend
  • Bank of Japan rate decision expected to bring about changes to inflation outlook
  • Yen weakness likely to resume against increasingly hawkish global central banks

The Japanese Yen managed to post gains against most of its peer currencies last week, ending a multi-week trend of broad weakness. USD/JPY was one of the biggest losers as Covid fears intensified, driven by the highly contagious Omicron variant. That pushed haven flows into the Japanese currency, but the strength likely won’t last.

That is because the Japanese economic recovery is lagging behind its peers, which will almost certainly keep the Bank of Japan’s (BoJ) dovish policy outlook unchanged. The BoJ will release its first policy decision of the year on Tuesday. There is a near zero chance of a rate hike, but policymakers may opt to change the language around inflation risks. The shift is expected to highlight the possibility that inflation could outpace the bank’s targets.

However, the chance that inflation does rise above the BoJ’s 2% target is slim at best, according to most forecasting models. Core inflation – a measure that strips out volatile items – is running under 1%. The resurgence in Covid cases across Asia and elsewhere may put some upward pressure on prices, although likely not enough.

The Yen may see some volatility around the BoJ announcement, but the most likely outcome is for additional weakness against currencies that are backed by growingly hawkish central banks. The Federal Reserve is expected to hike three or four times this year to combat entrenched inflation, and the European Central Bank is looking at its first rate hike in over a decade this year.

— Written by Thomas Westwater, Analyst for

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