Analysts at HSBC expect USD-JPY to finish the year at 100 compared to a consensus at 114, lazily close to spot as the failure of Abenomics to generate a lasting rise in inflation creates a gravitational pull lower for USD-JPY.

Key Quotes

“USD-JPY began its ascent (JPY weaker) in Q4 2012 on a promise of a re-orientation of monetary, fiscal and structural reform policy that Japanese authorities assured investors would finally and lastingly drive inflation higher.  But nearly five years into the experiment, little has changed on the inflation front. Easy monetary policy has failed to spur anything other than a temporary currency-related spike in CPI. Fiscal policy remains trapped between a desire for shortterm stimulus and the need for longer-term discipline. Structural reform has made progress, but slowly and not sufficiently in the critical area of labour market reform.”

“Yet strangely, the JPY remains 30% weaker against the USD than at the start of Abenomics. From the JPY perspective, it is not clear that much has happened to warrant such a sizeable re-pricing. From the USD side, little has changed also. There have been only three rate hikes in the normalisation process, not the sequence of hikes pencilled in by the Fed at the outset that was meant to take the policy rate above 3% by now. Hopes for US fiscal reflation have also proven misplaced, at least for now.”

“The USD strengthened on aspirations that have not been met. The JPY weakened on promises that have not been kept. We have already seen the USD reverse some of those ill-gotten gains so far this year with more to come. A similar reversal is overdue on the JPY.”

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