Japanese Yen Forecasts From MUFG Show a Decisive Turning Point Now in Sight

Image © Adobe Stock

Japanese lender MUFG Bank says the Yen faces a decisive turning point and will bring an end to the spell of multi-year declines against the Dollar, Pound and Euro.

In a monthly foreign exchange forecast update, MUFG says more rate hikes are to be expected from the Bank of Japan, which can support the Yen.

"We now expect the next rate hike to come in July," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank Ltd.

The Bank of Japan raised interest rates in March alongside other policy changes, which effectively amounted to the termination of the quantitative easing and negative interest rate policy frameworks adopted in 2013.

Despite the moves, the Yen fell to fresh multi-year lows against the Dollar, Pound and Euro in the days following the decision.

"The measures were largely as expected and the failure of Governor Ueda to more strongly indicate the prospect of additional rate hikes resulted in renewed yen selling as investors concluded that the event risk had passed and a still very substantial divergence in policy between Japan and the rest of the world would continue," explains Halpenny.

Yet, although the guidance may not have been as strong as market participants expected, Halpenny says certain comments do still suggest more hikes to come.

He notes Governor Ueda cited signs of stronger inflation and FX moves that impacted the inflation outlook as possible triggers for additional hikes.

MUFG says to watch the Bank of Japan meeting on 26th April, where it will provide its updated GDP and inflation forecasts, which will likely reveal a higher level of conviction on achieving its price stability goal.

Prior to the meeting we will also have the 3rd estimate from Rengo on the outcome of ‘Shunto’ wage negotiations that look set to show an agreed wage increase of over 5.00%.

"The wage agreement will likely have consequences for the BoJ updated inflation forecasts and forecasts that imply the price stability goal will likely mean Governor Ueda is set to communicate the prospect of additional rate hikes going forward," says Halpenny.

MUFG adds that the prospect of FX market intervention implies limited scope for further weakness.

In addition, "the BoJ hike with more to come coupled with Fed rate cuts commencing in June will see USD/JPY start to turn lower," says Halpenny.

Dollar-Yen is forecast at 145 by mid-year at MUFG and 140 by year-end, with the Euro-Yen at 158.10 and 156.80.

The Pound-Yen forecast is for 184.90 and 181.30.