USDJPY should continue marching higher, supported by bullish risk appetite and yield differentials turning in favour of USD. A test of 112.50 seems likely with recent latest signs of Japan resuming buying in foreign debt markets.
However, we doubt USDJPY can establish a long-term uptrend from here as medium-term downside risks remain in place.
First, pension fund 1Q losses will likely lead to higher FX hedging ratios, leading to JPY demand.
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Second, the BoJ’s Kuroda effectively ruling out ‘helicopter money’, i.e., funding of a government spending package via the BoJ balance sheet; the remaining policy tools (private asset purchases via ETFs, cutting rates further into negative territory or enlarging the JGB purchase programme) only have a limited impact on JPY valuation.
Hence, we view the anticipated move to 112.50 as a correction within a longer-term bear market.
