JPY To Be A Loser Over The Remainder Of The Year: Where To Target? - CIBC

Even more so than in the euro area, recent monetary easing has failed to lead to a weaker currency in Japan. The yen is now at its strongest level since 2014, only months after the Bank of Japan introduced negative rates on a portion of deposits held at the central bank.

There is, however, reason to believe that the yen will weaken over the course of the year.

The central bank remains in a position to double down on negative rates and take them all the way down to -0.5% around mid-year. Indeed, the BoJ’s minutes underline the view that the nation’s central bankers favour quantitative and qualitative easing and negative rates working in tandem to stimulate the economy.

It’s even likely that, given the disappointing economic performance, fiscal policy will need to support monetary policy, despite Japan’s unfavourable debt-to-GDP position. With the yen already relatively strong and the economy failing to produce significant signs of improvement, divergent monetary policy expectations with the Fed will stand out and see the yen be one of the few currencies to depreciate against the US dollar over the course of the year.

Indeed, net JPY longs remain around levels not seen since 2008, leaving room for a reversal, while Japanese investors have returned to buying foreign bonds at a pace not seen since 2010.

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As a result, look for the yen to gradually head back toward the 120 level by the end of 2016.