We still expect the BoJ to fight deflation risks with aggressive monetary easing and we now expect the BoJ to cut interest by 20bp in March as a response to a weaker growth outlook and the risk of low wage growth.
We forecast USD/JPY at 115 in 1M (previously 118).
In the short term however, the BoJ might find it difficult to battle the appreciation pressure on the JPY with monetary easing as the currency remain supported by fundamental factors such as a rising current account surplus and stretched valuations.
We forecast USD/JPY at 116 in 3M (120).
Longer term, fiscal headwinds are looming in terms of a possible vat increase in April 2017. This will probably turn the tide for the JPY again - especially as we still hold the view that the Fed will eventually resume its hiking cycle in September. Hence, with the support from cyclical divergence, relative monetary policy will to continue to support the case for a moderate increase in USD/JPY over the medium-term horizon.
We forecast USD/JPY at 119 in 6-12M.
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