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USD/JPY to see a break below 100


2 September 2020

During August the yen strengthened versus the US dollar from 105.67 to 105.26. Economists at MUFG Bank see further JPY strength ahead and think the USD/JPY will break below the 100 level.

One anchor for the yen we believe is the evidence of a credibility gap when it comes to the prospect of lifting inflation. The 5yr/5yr inflation swap rate for the US increased to the highest level since February before the COVID crisis. In Japan there has been far less evidence of that with inflation expectations remaining at much lower levels post-COVID. Adding to this uncertainty in August was the confirmation of the resignation of PM Abe for health reasons. A leadership election will take place in September and the candidates vying to take over signal in our opinion little prospect of any change in policy direction any time soon.

The key aspect of policy in Japan is of course the agreement between the government and the central bank to work together. Governor Kuroda will be in his position until April 2023 and we see no logical reason why an incoming government would want to threaten the relationship with the BoJ. Still, with the markets already showing scepticism over achieving higher inflation, the speculation over Abenomics is unhelpful and will only reinforce doubts over future inflation.

We believe it is only a matter of time before USD/JPY breaks back below the 100.00-level. The global pandemic will have notable repercussions for keeping global yields lower for longer and increased uncertainty will likely reduce FDI outflows and encourage investors to hedge more of their foreign currency exposures.

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