Yen prepared a surprise. Forecast as of 30.10.2023


High inflation and significant QE spending suggest that BoJ’s yield curve control policy is no longer appropriate. It’s time to normalize monetary policy. But will the Bank of Japan meet the expectations of investors? Let us discuss the Forex outlook and make up a USDJPY trading plan.

Weekly Japanese yen fundamental forecast

Inaction is sometimes also action. However, to gain time, the regulator needs to take some steps. The Bank of Japan faces a difficult choice. It could leave it as is and send the USDJPY to multi-year highs while opening the door for a speculative attack on its yield curve control policy. Or the Japanese central bank could raise the cap on the target range by +/-1%, which would support the rally in bond yields to levels inconsistent with economic fundamentals.

On the face of it, it’s high time BoJ did something. Inflation has exceeded the target since 2021. In October, consumer prices in Tokyo unexpectedly accelerated to 2.7%. Updated inflation forecasts are expected to be raised, with the rate projected to be above 2% for three consecutive years. This is a real achievement because nothing like this has happened since the 1990s.

The yield curve control policy has also ceased to be appropriate. To keep debt market rates within a range, the Bank of Japan is buying as many bonds as it did at the peak of QE in 2016. UBS forecasts the trading channel to widen to +/-1.5% in October. According to Barclays forecasts, Kazuo Ueda will abandon it altogether. On the contrary, Goldman Sachs, Nomura, and Morgan Stanley argue that everything will remain as it is.

Dynamics of BoJ bond buyouts

Source: Bloomberg.

BoJ is quite capable of maintaining the previous parameters of monetary policy, as it focuses on the dynamics of average wages, which leaves much to be desired. Hence, the fear that the acceleration of inflation is a temporary phenomenon. That is natural thinking for a country experienced deflation for several decades.

In addition, there are high risks that abandoning the yield curve control will make the bond yields soar. Futures contracts signal that in such a scenario or when the range expands, the yield will immediately exceed 1% and continue to rise. As the Fed’s example shows, this would be equivalent to monetary restriction and, on paper, would cool inflation. It will not be the best outcome for the Bank of Japan.

Dynamics of actual and expected Japanese bond yield

Source: Bloomberg.

Thus, the BoJ faces a hard choice. Investors are naturally worried. The volatility of the yen is growing, and the USDJPY price has fallen below the critical level of 150. If earlier traders were frightened by possible currency interventions, now they are worried by the BoJ’s potential monetary normalization.

Weekly USDJPY trading plan

Thus, investors are prepared for a surprise. However, history shows that the Bank of Japan does not always meet market expectations. If the Japanese central bank remains passive, the USDJPY could reach the target for the earlier suggested longs at 152. Citi even suggests the upside targets at 153 and 155. Otherwise, proved the yield target range widens or is abandoned, the USDJPY will go down to 147.8-148.1.

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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