JPY: Reflection of the USD - HSBC

In view of the analysts at HSBC, movements in USD-JPY only reflect changes in US sentiment, as depicted through the US 10Y yield.

Key Quotes

 “The JPY has been driven by cyclical, structural and political factors in recent years. In late 2012, the election of Prime Minister Abe and the announcement of aggressive QE was a political driver. This brought with it an expectation that Japan’s previous structural frailties – low growth and low inflation – would be altered. So the JPY weakened on these political and then structural expectations. The market then waited for the cyclical pick up in the data. However, the cyclical data failed to validate this. It seems the impetus from Abenomics has burnt out. So now the JPY does not have local politics, local structural expectations, or local cyclical hopes for inflation.” 

“The absence of such domestic drivers alongside the BoJ’s policy to anchor the 10Y JGB yield has meant that USD-JPY shadows movements in the US 10Y yield. So, movements in USD-JPY only reflect changes in US sentiment, as depicted through the US 10Y yield. As we see US Treasury yields falling during the year (HSBC forecast the US 10Y at 1.60% for year-end), the interest rate differential between the US and Japan will narrow, and USD-JPY will fall accordingly. Alternatively if the BoJ abandon this policy, it is likely that JGB yields will rise. This too will narrow the differential, prompting a move lower in USD-JPY. We now forecast USDJPY at 100 by year-end (from 110 previously).”