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USD/JPY to decline gradually after September

7 September 2021

Economists at MUFG Bank expect the USD/JPY will continue to gradually decline in light of expectations that yields will remain subdued, the overvalued dollar and swelling US current account deficit, and the yen's recovery from low levels. In September, we expect the FOMC meeting will help to support the USD/JPY, but expectations of a slowdown in global economic growth are likely to drive the yen higher. We, therefore, expect the tussle between the dollar and yen to keep USD/JPY movements centered around the 109 level.

Economic indicators suggest that the market is increasingly likely to anticipate a slowdown in growth both worldwide and in the US. We expect this would result in expectations that it will be quite some time before the Fed hikes rates, which is likely to be accompanied by a softening of the dollar.

We expect the USD/JPY to weaken slightly toward 109 rather than 110 through to the end of the month. Looking out to October and beyond, the Fed is likely to start tapering in December, but we do not expect this to do much to strengthen the dollar. We think it will still take time for the labor market to improve, and US rate hike expectations are unlikely to grow if inflation pressure also gradually eases. We doubt UST yields will show a clear uptrend in the absence of higher expectations for the potential growth rate and inflation.

Tighter supply/demand for dollar funds in money market toward the end of the year has not produced a seasonal boost to the dollar for the last two years in FX market. We therefore still think the most likely scenario is that the USD/JPY will decline gradually as the Fed moves to normalize monetary policy.




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