Recent comments from Japanese PM Abe’s advisor Hamada (widely regarded as the theorist behind Abenomics) regarding the divergence between spot USDJPY (around 120 at the time of his comments) and PPP levels (judged to be around 105) have resulted in an increasingly dispersed set of expectations for USDJPY, especially ahead of the BoJ’s 30 April meeting where the bank will update its economic outlook, notes Credit Suisse.
"Hamada’s comments do not materially impact our long-term bearish view on the JPY or on our house expectation for further BoJ easing by October. After all, merely stating the obvious is not new information for the market," CS argues.
"But the recent downdraft in JPY implied volatility, improvement in Japan’s balance of payments and lower Fed hiking expectations lead us to trim our USDJPY 3m forecast from 125 to 122. And after all, if the guru behind Abenomics is openly suggesting that USDJPY may have run far enough for now, the market may see that as a validation of the idea that upside is limited," CS projects.
"Nonetheless, we retain our 12m 127 forecast as the structural home bias of Japanese investors continues to unwind – supported by the BoJ crowding out of JGB investors and the GPIF reallocating into foreign assets – outweighing any oil and yen weakness related gains in the BoP (Onward and outward). Fed rate hikes over that time horizon will also help," CS adds.
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