Bank of America (BofA) outlines three primary reasons why dips in the USDJPY exchange rate are likely to be both shallow and short-lived. Despite the Bank of Japan’s (BoJ) recent adjustments to its Yield Curve Control (YCC), BofA maintains its expectation for USDJPY to rise to 147 by September.
Key Points:
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Unlikely Capital Repatriation: BofA does not foresee Japanese investors repatriating capital in the current fiscal year due to the recent YCC tweaks. This lack of repatriation is attributed to the preparation investors undertook last fiscal year in anticipation of BoJ’s policy normalization.
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No Indication of Multiple Rate Hikes: Despite the BoJ’s recent action, BofA believes it does not necessarily indicate a clear change in stance towards multiple rate hikes. Governor Ueda reiterated a patient stance, possibly acknowledging inflation’s upside risks.
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Reduced Market Volatility: Interestingly, the adjustments in YCC seem to have led to a decline in the USDJPY’s implied volatility, contradicting the idea that these changes might spark increased market volatility.
Summary:
BofA asserts that recent changes to the BoJ’s YCC are unlikely to significantly impact the USDJPY exchange rate. The bank predicts that any dips in the exchange rate will be both brief and limited in scope, maintaining its outlook for USDJPY to reach 147 by September. This forecast is supported by the lack of expected capital repatriation by Japanese investors, no clear indication of multiple rate hikes from the BoJ, and a decrease in implied market volatility.
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