USD/JPY: Yield spreads favor yen appreciation – CIBC

Yen gains are likely to continue as real yield spreads remain under pressure. Subsequently, economists at CIBC expect the USD/JPY pair to plunge towards 101 in the first quarter of 2021. 

Key quotes

“With covid cases continuing to advance across Japan and with monetary policy already largely tapped out, we can expect a third supplementary budget, scheduled for next month. Look for the fiscal boost to be scaled up to provide an additional fiscal impulse in an effort to offset reductions in broad consumer sentiment.” 

“Should real yield spreads remain pressured, we can expect Japanese investors to remain reticent regarding exporting capital or at least channelling fund flows into USD. Under such a scenario this continues to favor maintaining a bias towards JPY gains, at least against a subdued USD.” 

“While Finance Minister Aso warned of the potential difficulties faced by exporters should the USD continue to weaken, it seems that for now at least, the authorities remain more in a listening mode. If, as we expect, the USD/JPY cross to test 2020 lows into Q1, towards 101, the authorities may find it harder to resist verbal attempts to try to restrain JPY impetus.”