USD/JPY to weaken in the long-term

Institutional analysts are generally bearish about USD/JPY in the medium-to-long run. They mostly view interest-rate cuts by the Fed as inevitable – a question of when not whether. There is also an increasing consensus that there will be more interest-rate hikes from the Bank of Japan (BoJ). 

According to a Bloomberg survey of economists, the majority believe the BoJ will raise interest rates again in October, if not before. 

In contrast the Fed is expected to cut as soon as June, with a probability of 69.9% rates will come down in that month, according to the CME FedWatch tool. 

“We think the US-Japan yield differential is set to narrow, this, among other factors, should provide support for the JPY,” say economists at HSBC. 

The Yen is destined to rise across the board, in fact, as global inflation comes down and central bank easing gains momentum, according to analysts at MUFG. 

"When global yields do start to move lower, the stance of the BoJ will certainly reinforce the scale of yen appreciation,” they say in a recent note. 

The yen could fall to the 140.000 level once the reversal gets underway and the yield spread between the US and Japan narrows. 

“​​We still see scope for USD/JPY to drop to at least 140.00 by year-end with risks of a move to the mid-130.00’s,” adds MUFG. 

ING are not as convinced USD/JPY will go lower arguing such a move would be dependent on the US Federal Reserve cutting interest rates, something still not guaranteed.

“A recovery in JPY remains even more strictly tied to US rates breaking lower."