USD/JPY: Dovish BoJ suggests modest yen depreciation – CIBC

Analysts at CIBC consider that the decision of the Bank of Japan to continue with its easing policy will keep the yen limited. They forecast the USD/JPY at 135 by the end of the third quarter and at 132 by year-end. 

Key Quotes: 

“To no surprise, the BoJ maintained its commitment to broad monetary policy easing at its recent meeting. We would expect that any change in the policy environment is set to be left to Kuroda’s successor after Q1 2023.”

“The scale of holdings, amplified by recent measures to defend the 0.25% yield cap, may eventually prompt the BoJ to consider an adjustment in the YCC threshold. However, for now, we remain biased towards a perpetuation of easy policy, maintaining a broad defensive status for JPY.”

“BoJ policy inertia needs to be set against a downgrade in growth assumptions and an upgrade in the CPI profile. In terms of the former, the growth assumption for the current fiscal year was trimmed from 2.9% in April to 2.4% now.”

“Yet while inflationary pressures for the current year are revised up, core prices for fiscal year 2023 remain well below target at 1.4%, previously 1.2%. BoJ Governor Kuroda will likely see that tame underlying trend as justification for the BoJ to remain a broad central bank outlier, even if they face the inflation impetus of a modest further depreciation of the yen in the next few months. The lack of any further Fed tightening in 2023 should see the yen recover some lost ground next year.”