USD/JPY: A reversal of widening yield differentials with the US should support the Yen – Standard Chartered

The Bank of Japan (BoJ) tweaked its yield curve control policy (YCC). USD/JPY rallied after the BoJ’s policy announcement. Economists at Standard Chartered analyze Yen’s outlook.

Bout of JPY weakness between now and the next meeting in December should be fleeting

The likely bout of JPY weakness between now and the next meeting in December should be fleeting, especially if the authorities formalise the removal of YCC by then and start contemplating the end of NIRP in 2024. Said differently, a reversal of widening yield differentials with the US should support the JPY, although timing it remains tricky.

The BoJ’s forecasts paint a more nuanced picture for the economy. While it lifted growth and core-core inflation forecasts for FY23, it downgraded its FY24 growth forecast to 1% (July estimate: 1.2%) and raised the core-core forecast marginally to 1.9% (1.7%). That the core-core inflation forecast is just shy of 2% suggests that the BoJ needs a tad more convincing of progress on ending the multi-decade deflationary woes. 

Going forward, we would watch for verbal messaging from the BoJ on growth and inflation prospects as a prelude to further policy normalisation down the line.