ABN Amro: 2016 Year-End USD/JPY Forecast Lowered

Roy Teo, Senior FX Strategist at ABN Amro believes the yen will contine strengthening against its US counterpart through the remainder of 2016. He writes:

The Japanese yen (JPY) rallied 3% from above 111.50 against the US dollar towards 108 after the Bank of Japan (BoJ) decided to leave monetary policy unchanged today.

This is despite the fact that they have downgraded their GDP and inflation forecast for fiscal years 2016 and 2017.

This disappointed market expectations (including our own) that the BoJ would increase its monetary stimulus given weaker exports and inflation outlook.

It does seem that the BoJ is more tolerant towards short term weakness in exports and inflation with the view that both economic indicators will increase moderately as the outlook for emerging economics and crude oil prices improve.

The BoJ also estimates that the output gap will turn positive in the second half of fiscal year 2016 given that the potential growth rate in Japan is estimated to be in the range of 0-0.5%.

Hence the hurdle rate for further monetary stimulus in the coming months seems to be higher.

As a result, we now expect the JPY to strengthen to around 105 in the second quarter of this year.

Ahead of the G7 summit on 26-27 May, the Ministry of Finance is unlikely to intervene in the currency market to weaken the JPY unless volatility in the currency market is extreme or one sided.

Nevertheless, the risk of currency intervention will increase if USD/JPY declines closer to 100.

Given our view that the BoJ is still likely to step up their monetary stimulus in the second half of this year, a weaker JPY towards 110 at the end of this year is still envisaged.