JPY: Some modest appreciation expected over the medium-term

Analysts at Wells Fargo, expect a modest yen appreciation over the medium-term, although the pace of monetary tightening from other developed central banks will also be an important influence for the path of the yen. They see the Bank of Japan making further adjustments towards less accommodative policy earlier than markets are currently anticipating.

Key Quotes:

“One key theme heading into 2019 is likely to be monetary policy convergence. We believe central banks of developed economies will continue to remove accommodative monetary policy stances and eventually follow the Federal Reserve’s path towards higher interest rates. In July of this year, the Bank of Japan (BoJ) introduced modest adjustments to its monetary policy framework, allowing for a wider trading range for yields on Japanese government bonds (JGB’s). While we believe the BoJ will continue with its ultra-loose monetary policy, it is our view the BoJ will make further adjustments towards less accommodative policy earlier than markets are currently anticipating.”

“With Japan’s economy steady, along with the central bank’s objective to ensure financial stability, we forecast the BoJ to increase its main policy rate to 0% from -0.10% as well as widen the tolerance band to +/- 30bps on 10-year JGB’s as early as Q2-2019.”

“As the Federal Reserve and other developed central banks around the world look to hike rates in 2019, interest rate differentials will continue to determine the short-term path of the yen. We currently forecast three rate hikes from the Fed, while we also expect further monetary tightening measures from the Bank of Canada and Bank of England, while the ECB will begin to remove accommodative monetary policy in 2019 as well.”

“Even with less accommodative policy from the BoJ, Japanese yields are likely to remain low, suggesting a subdued performance from the Japanese currency. We do expect some modest appreciation in the yen over the medium-term, although we see this as more a reflection of overall U.S. dollar softness rather than independent yen strength.”

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