The Japanese yen proved by far the weakest performing major in the first half of 2021, as it depreciated by 7% versus the US dollar. The Bank of Japan (BoJ) monetary policy will remain easy for a protracted period as the economy remains challenged, resulting in yen depreciation ahead, according to economists at CIBC.
Yen outlook challenged by economic underperformance and BoJ policy inertia
“Extended COVID-19 emergency restrictions, which have resulted in the economy slumping into an H1 recession. Moreover, the lack of activity has proved to extend long-term disinflationary influences. As a result, domestic monetary policy will remain easy for a protracted period beyond fiscal year 2023.”
“Still, after a disappointing H1, the outlook for H2 looks somewhat more encouraging. The latest quarterly survey business survey (Tankan) revealed large manufacturer optimism at levels not seen since the end of 2018, and showed a substantive increase in capital expenditure expectations. After anticipating a modest 3% increase in Q1, expenditures are now expected to increase by 9.6%.”
“Headwinds in the domestic economy suggest that the expected rebound in H2 could prove somewhat weaker than expected. While rising capex and the prospect of a cheap JPY boosting profits is encouraging, there is little to detract from the expectation of a protracted period of policy inertia, keeping USD/JPY well supported.”
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