Drivers For JPY Strength Still In Place; En-Route To 87 By Year-End
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With disappointment from the BoJ easing on 29 July and no surprises on the fiscal policy front, USDJPY is trading heavily around 101 after erasing most of the gains made from excessive policy expectations built after the Upper-House election in mid-July.
On 2 August, the Abe Cabinet approved the JPY28.1trn (5.6% of GDP) economic package, including JPY7.5trn in direct fiscal expenditures over multiple years, which should boost the first-year GDP by only about JPY5trn (1% of GDP), much less than its inflated headline figure. While such renewed policy stimulus may support Nikkei and USDJPY in the near term, we maintain our medium-term bullish view on the JPY given that the fundamental drivers of JPY strength remain intact.
With major policy headlines now behind us, the JPY will likely be driven by global factors, including the Fed hike outlook and risk sentiment.
Barclays targets USD/JPY at 92 by end of Q3, and at 87 by end of the year.