USD/JPY: Domestic outlook deteriorates, putting pressure on yen – CIBC

Amidst the fourth COVID-19 wave, a combination of ultra-easy monetary policy and net JPY outflows underline yen weakness ahead, Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, reports. 

See – USD/JPY: Dollar weakness vs. yen weakness, three scenarios for the pair – MUFG

Domestic investors losing appetite for domestic paper

“While global activity assumptions have generally moved higher lately, Japan faces continued domestic headwinds. A fourth wave of Covid has been met with a third state of emergency. The latest measures, broadened from an original four prefectures, will compromise high-frequency data and underline that by Q2, the economy will be back in a technical recession.” 

“Amidst ongoing threats to the staging of the Olympics, domestic surveys reveal overwhelming support for postponement or cancellation. The weakening growth trajectory has forced the BoJ to acknowledge that they will miss their CPI target by the end of fiscal year 2023. If so, Governor Kuroda will have presided over a decade of missed inflation targets.”

“The weak growth environment has encouraged LDP lawmakers to begin to discuss the option of yet another fiscal package, although the lower house election in the autumn may get in the way. Discussion of the potential purchasing of foreign bonds underlines moves to cheapen the JPY. But private capital flows will work in the same direction in any event. With nominal yields set to be compromised by ultra-easy policy, we can expect domestic investors to continue to search for higher-yielding foreign assets. The combination of ultra-easy policy and net JPY outflows foretells JPY weakness ahead.”