The Japanese yen could strengthen to 120 per dollar by the end of the year on the back of a change in the central bank policy.
“We have quite high conviction in our view — we’re looking at 125 [per dollar] by the end of June, and we’re actually looking at 120 by the end of this year,” said Craig Chan, Nomura’s head of global FX strategy.
The forecast is supported by Nomura’s view that the Fed has reached “the peak” in terms of hiking rates, as well as how Japanese financial holding company expects the Bank of Japan could to tweak its yield curve policy.
“We believe the Fed is at the peak. But I think it’s also about the local story. There’s certainly, in our view, still tweak risk around BOJ policy,” said Chan.
In his inaugural briefing on Monday, the BOJ’s new governor Kazuo Ueda emphasized his intention to “maintain unconventional monetary policies” to achieve the central bank’s 2% inflation goal, local media reported.
Ueda said it was “appropriate” to retain the bank’s current yield curve control (YCC) policy and its negative interest rate policy.
Under Japan’s yield curve control policy, short-term interest rates are kept at an ultra-dovish level of -0.1%, and the 10-year government bond yield at 0.5% above or below zero.
The U.S. March consumer price index came in cooler than expected, with some economists predicting the Fed’s rate hiking cycle could soon come to a halt.
The Japanese yen last traded at 133 against the U.S. dollar in Asia trade on Thursday. A 120 yen per dollar forecast would mean the currency will strengthen about 21% from Oct. 20′s peak of 151.94.
While it’s different to gauge what kind of tweak the BOJ will undertake, and when it could take place, Chan said “the probability increases as we continue to move along this year.”
“It could maybe be moving the target away from the 10-year, perhaps to five-year, to two-year,” he postulated, saying a “complete abandonment of the policy is quite unrealistic at this point.”
As for when the potential tweak could happen, Chan forecast it could come as soon as the end of April, or June.
Total removal of YCC?
Similarly, Standard Chartered Bank’s Asia FX Strategist Divya Devesh on Tuesday estimated that markets could see dollar-yen at 120 later this year.
However, instead of just a tweak, he predicts that the currency will continue to strengthen, driven up by a complete overhaul of the YCC.
“Our baseline scenario is that we expect the Bank of Japan to essentially remove its YCC at the June meeting… in its entirety,” said Devesh.
While he acknowledged that either removing the band completely or widening it is feasible, he doesn’t think the central bank will undertake the latter.
“If [they] move it in an incremental manner … markets will start speculating and markets will want to price that now and not at the BOJ meeting, and that becomes a problem for the Bank of Japan,” Devesh explained.
“From a Bank of Japan perspective, it’s perhaps easier to just do away with with the YCC.”
This article was originally published by CNBC.
