USD/JPY will likely break out of its recent range to the upside, projects BNP Paribas.
“It has largely traded between 100.98 and 103.88 since early this year. Although we expect US policy to be a catalyst, the Bank of Japan (BOJ) may prove to be a key driver – Japan now has one of the highest inflation rates in the G10. Our economists expect the BoJ to engage in ‘financial repression’ to restrain the rise in JGB yields that results from Japan’s fiscal dynamics,” BNP says as a rationale behind this view.
“A larger overshoot in Japan’s inflation rate would also see the yen weaken. If inflation gets out of hand, we could, our economists suggest, see an ‘operation twist’ policy in Japan – similar to that witnessed in the US. This would entail aggressive purchases of JGBs coupled with interest rate hikes to stave off inflation. The resultant inversion in the yield curve, along with the upside shock to inflation, is a risk scenario for Japan and the ensuing adverse growth-inflation paradigm would necessarily entail a weaker yen,” BNP argues.
“In addition, a re-allocation in the government pension investment fund (GPIF) and a likely pick-up in Japanese outflows will mean JPY weakens,” BNP adds.
In line with this view, BNP maintains a long USD/JPY position as a trade recommendation from 101.85, targeting 105.50, with a stop loss set at 100.65.