Analysts at Danske Bank expect the Bank of Japan to keep policy unchanged for the next 12M and sees relative rates as a factor driving JPY weakness.
Key Quotes
“We target EUR/JPY at 122 in 1M, 124 in 3M, 129 in 6M and 135 in 12M.”
“Outlook for EUR/JPY
We expect the Japanese economy to continue to grow above trend in coming years. While exports and production have been on an increasing trend, mainly on the back of the cyclical improvement in the global manufacturing sector, domestic demand remains supported by the government’s fiscal stimulus package. We estimate annual Japanese GDP growth of 1.2% in 2017 and 0.9% in 2018 (FY 2016 1.3%, FY 2017 1.1%).
Since the introduction of Yield-Curve Control (YCC) in 2016, under which the Bank of Japan (BoJ) now targets both the short-term policy interest rate (at -0.1%) and the 10Y Japanese government bond (JGB) yield (at 0%), the BoJ has de facto tapered its JGB purchases and is currently buying an amount equivalent to an annual pace of JPY60trn. We expect the BoJ to keep its policy unchanged throughout our 12M forecast horizon and, while the BoJ could taper further, we think the yield spread relative to the US – and not the amount of JGB purchases – will remain a key driver for JPY crosses in general.
On 10 May, BoJ Governor Haruhiko Kuroda, in a speech to Parliament, said that the current pace of JGB purchases is around JPY60trn per year and thus lower than the BoJ’s previous annual purchase target of JPY80trn. As such, the scale down of JGB purchases has been evident in the BoJ’s publicly available data since the BoJ changed its monetary policy framework in September 2016 when it introduced yield curve control. For the FX market, we highlight that the yield spread – and not the amount of JGB purchases – is the main driver for JPY crosses as higher foreign yields support Japanese demands for foreign bonds and encourage Japanese investors to reduce the hedge ratio on foreign assets as hedging costs increase.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.