USD/JPY: BoJ speculation may curtail yen strength – MUFG

Analysts at MUFG Bank, forecast the USD/JPY pair will break below 100 later in 2021. They consider the yen will likely strengthen but they see the risks from the Bank of Japan. 

Key Quotes:

“The yen underperformed toward the end of this week with BoJ monetary policy coming into focus ahead of the key meeting in March. Next week we get some key economic reports with Q4 GDP on Monday set to show another robust quarter of GDP growth. The consensus is for a gain of 10% on a SAAR Q/Q basis following a 22.9% gain in Q3. The shine will be taken off by expectations of slower growth in Q1 due to renewed lockdowns but nonetheless, it is clear Japan is benefitting from a combination of a less serve COVID situation than Europe or the US; aggressive fiscal stimulus; and the closer ties to China.”

“We currently forecast USD/JPY breaking below 100 later this year. We have assumed little in the way of action from the BoJ, as long as recovery takes hold and there is no sharp surge of the yen. Hence, the news this week that the BoJ is considering altering its communication to indicate greater scope for further cuts in rates could be very significant. Reports from “people familiar with the matter” suggest the BoJ want to alter the general consensus view that the BoJ does not have the option to cut rates.”

“The form any communication takes on future possible rate cuts by the BoJ will be important and could serve to at least slow the pace of yen strength. Speculation in the run-up to the March announcement could see the yen underperform.”