• US and Japan central banks use similar policies, but with different results.
  • US government bond yields will guide USD/JPY amid persistent uncertainty.
  • The USD/JPY pair is set to retest the 2015 high at 125.85 in 2022.

The USD/JPY pair started the year trading at 103.15, and it's ending it roughly 1000 pips higher in the 113.00 region. In November, it peaked at 115.51, its highest since January 2016.

Inflation, yields and sentiment

As usual, risk-related sentiment led the way for the pair, which made most of its gains in the first quarter of the year, as mounting inflationary pressures sent the yield on the 10-year US Treasury note to 1.746%. US government bond yields are the ultimate measure of risk sentiment but also indicate how speculative interest perceives inflation.

Yields move inversely to bond prices. When the market is optimistic, it demands fewer bonds and seeks high-yielding assets instead. Yields need to deliver a more attractive return for governments to raise money. Yet, at the same time, and as inflation tends to erode the value of future coupons and principal repayments, yields rise when price pressure mounts. The pair peaked at 110.99 in March 2021, spending the next few months consolidating to resume its advance in October, when the yield on the mentioned 10-year bond flirted again with the 1.70% threshold.

The US Consumer Price Index rose 0.6% in March from the previous month and 2.6% from a year ago, according to the Labor Department. Back then, market players were optimistic the end of the pandemic was around the corner, and policymakers blamed higher inflation on the solid economic recovery, and claimed it would be “temporary.”

Nobody figured out back then that US inflation would rise at an annual pace of 6.2% in October, the sharpest increase in 31 years. Policymakers maintained the “transitory” word when defining inflation but added that it might persist by longer than initially estimated. Supply chain issues and higher oil prices were liable to increase price pressures.  

In contrast, Japan's Consumer Price Index rose by 0.1% YoY in October 2021. The Bank of Japan has been fighting deflation for over a decade, to no avail. Slowing economic growth starting a couple of decades ago pushed the Bank of Japan into a massive bond-buying program that it maintains today. This was partly because the pandemic was a global phenomenon so it forced policymakers everywhere into boosting financial support to keep borrowing costs near zero and entice consumers and companies to spend more.

BOJ and the Fed are facing different challenges

Early in December, the BOJ announced its decision on monetary policy. The benchmark interest rate was kept at -0.1%, as well as the yield-curve control, which aims for the 10-year bond to yield to stay at around 0.0%. At the same time, policymakers announced plans to scale back emergency financial support by March 2022, as planned. They also decided to extend the loan scheme for smaller companies until September 2022.

The central bank forecasted 0% inflation for the fiscal year that ends in March 2022.

“Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad. Overseas economies have recovered on the whole, albeit with variation across countries and regions. In this situation, exports and industrial production have continued to increase as a trend, despite remaining weak due to the effects of supply-side constraints,” the latest BOJ’s statement reads.

The Japanese government is considering raising its economic growth forecast for the next fiscal year, to take into account the effects of its record $490 billion stimulus package.

The US Federal Reserve announced it will start trimming its pandemic-support program in November and doubled it in December,  to $30 billion, from $15 billion as announced previously, starting January 2022. That means the central bank will stop buying $20 billion Treasuries and $10 billion Mortgage-Backed Securities per month.  

US inflation forecasts, according to the Fed, have been raised to 5.6% for 2021 and to 2.6% for 2022, up from 4.2% and 2.2% previously. The Gross Domestic Product is now projected at 4% in 2022, up from the previous median forecast of 3.8%, while the economy is estimated to grow 2.2% in 2023, down from the 2.5% from September.

No end in sight for Japan’s stagnation

The two countries seem to be in different worlds, as while inflation skyrockets in the US, it remains flat in Japan. At this point, and since “Abenomics” came into play back in 2013, it has not been a game-changer for USD/JPY after the initial impact. Japanese policymakers have maintained rates negative and ultra-loose quantitative easing for over almost a decade, but the results have been scarce, to say the least.

The pandemic has been blamed for skyrocketing inflation in most of the Eastern world, as well as higher inflation in New Zealand and Australia. How come Japanese inflation is not showing signs of life?

It could be partially explained as a cultural factor. Consumer’s expectations of lower prices made it impossible for companies to raise prices without risking angering people. Sluggish economic progress keeps wages steady, exacerbating consumers’ reluctance to pay higher prices. An ageing population is also a negative factor.  
 
Following decades of substantial growth, Japan has suffered from stagnation,  a condition marked by low inflation, low interest rates and sluggish growth, since the 1990 stocks’ bubble crisis.

Maybe it’s a good time to think about the role of the current monetary policies and their real impact on economic developments.

What’s next for USD/JPY?

The USD/JPY pair has been on a long downtrend since June 2015, changing course in March 2021 after breaking a descending trend line drawn from 125.85. It took the pair six months to finally break higher and reach the yearly high at 115.51. From the current area, and once beyond that level, there’s little in the way of resistance until the 118.60 price zone, where the pair topped in December 2016 and January 2017.

The monthly chart shows that a strong static support level has formed in the 111.60 area, with a break below it exposing the 110.00 region. It would take a break below 107.70 for bears to regain long-term control.

Technically speaking, the long-term perspective is bullish. In the mentioned monthly chart, the pair is developing above all its moving averages, with the 100 SMA currently at around 110.10, reinforcing the static support area. Technical indicators are advancing within positive levels, with room to extend gains but a lack of momentum.

Bulls are in control in the weekly chart, with the pair offering a firmer upward potential. The 20 SMA is advancing above the longer ones, while technical indicators resumed their advances after correcting overbought conditions, hinting at increasing buying interest.


Gregor Horvat projects a bullish continuation for the yen/dollar pair on his Elliott Wave analysis:

USD/JPY Elliott Wave Analysis

fxsoriginal by Gregor Horvat


USDJPY came higher in 2021 on speculation above FED tapering which was delivered in November. USD moved higher with US yields, but pair is now at the upper side of a five-year range, so we should be aware of a potential slow down. Ideally, that’s going to be wave E) pullback of B triangle that can cause more upside in second part of 2022.


fxsoriginal


Forecast Poll 2022

Forecast Q1 - Mar 31st Q2 - Jun 30th Q4 - Dec 31st
Bullish 26.92% 25.81% 37.50%
Bearish 7.69% 12.90% 43.75%
Sideways 65.38% 61.29% 6.25%
Average Forecast Price 114.0723 114.8219 115.9509
EXPERTS Q1 - Mar 31st Q2 - Jun 30th Q4 - Dec 31st
Alberto Muñoz 116.0000 Bullish  118.7500 Bullish   122.0000 Bullish
Andrew Lockwood 113.5000 Sideways  115.0000 Sideways  117.0000 Sideways 
ANZ FX Strategy Team 116.0000 Bullish 116.0000 Sideways  116.0000 Sideways 
Brad Alexander 115.0000 Sideways  118.0000 Bullish 122.0000 Bullish
Brian Wang 118.4200 Bullish 115.8900 Sideways 120.6500 Bullish
Barclays 114.6700 Sideways 115.6700 Sideways 115.3300 Sideways
BMO Capital Markets Team 114.0000 Sideways 114.0000 Sideways 113.0000 Sideways
BNP Paribas Team   115.6700 Sideways 117.6700 Bullish
BoA FX Rates and Commodities Team 116.0000 Bullish 117.3300 Bullish 118.0000 Bullish
Frank Walbaum 111.5000 Sideways 110.0000 Bearish 106.0000 Bearish
CIBC World Markets Team 114.6700 Sideways 115.6700 Sideways 114.3300 Sideways
CitiFX 115.0000 Sideways 115.6700 Sideways 115.3300 Sideways
Commerzbank Analyst Team   116.6700 Bullish 118.0000 Bullish
DBS Group Research 114.6700 Sideways 115.6700 Sideways 117.6700 Bullish
Goldman Sachs Global Investment Research 115.0000 Sideways 113.0000 Sideways 111.0000 Sideways
ING Global Economics Team 113.6700 Sideways 114.6700 Sideways 119.3300 Bullish
JP Morgan   116.6700 Bullish 116.3300 Sideways
Matias Salord 111.7500 Sideways 109.6500 Bearish 116.7000 Sideways
NAB Global Markets Research 111.3300 Bearish 111.6700 Sideways 111.0000 Sideways
NatWest Markets   117.6700 Bullish 119.6700 Bullish
Navin Prithyani 112.0000 Sideways 115.0000 Sideways 117.5000 Bullish
Murali Sarma     116.6000 Sideways
Nenad Kerkez 112.3000 Sideways  115.0000 Sideways 117.5000 Bullish
Rabobank Financial Markets 114.0000 Sideways 114.5000 Sideways 115.0000 Sideways
RBC Economic Research Team 112.0000 Sideways  113.0000 Sideways  117.0000 Sideways 
Societe Generale Analyst Team   115.6700 Sideways 114.0000 Sideways
Standard Bank Research Team 113.3300 Sideways  112.3300 Sideways 110.0000 Sideways
UniCredit Research 109.0000 Bearish 108.0000 Bearish 106.0000 Bearish
Wells Fargo Research Team 116.0000 Bullish 118.0000 Bullish 121.0000 Bullish
Westpac Instituional Bank Team 115.6700 Bullish 116.0000 Sideways  117.0000 Sideways 
Usman Ahmed 114.4000 Sideways 118.4000 Bullish 122.2000 Bullish
Yohay Elam 116.0000 Bullish 110.0000 Bearish 111.0000 Sideways

 

In late 2021 the USD/JPY was bolstered by news of a faster QE reduction by the Federal Reserve and promises of three rate hikes in 2022 in line with market expectations. In 2022 the pair is seen edging lower as markets will have digested the news and the Fed’s hawkish moves will have been priced in. The safe-haven JPY will remain largely supported in 2022 amid a broader risk-off sentiment and as inflation rates continue to rise in the US.

by Frank Walbaum

Considering USD strength in 2022, USDJPY should move higher in the coming months, although rising Japanese repo rates may weigh in the first quarter.

by Alberto Muñoz

Price could sell until 112 for the first quater, if that price then holds the buys should continue for quater two and three until 115. If the buys are strong quater four should continue the buys until 117.5.

by Navin Prithyani

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