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A Japanese 10,000 yen and a US 100 dollar bill juxtaposed against each other in Tokyo, Japan, Monday, June 20, 2016.
Tomohiro Ohsumi | Bloomberg | Getty Images
THE japanese yen could strengthen to 120 to the dollar by the end of the year due to a change in central bank policy.
“We have a pretty high conviction in our view – we’re looking at 125 [per dollar] by the end of June, and we’re actually looking at 120 by the end of this year,” said Craig Chan, Nomura’s head of global currency strategy.
The forecast is supported by Nomura’s view that the Fed has reached “the peak” in terms of rate hikes, as well as how the Japanese financial firm expects the Bank of Japan to alter its course. yield curve policy.
“We think the Fed is at the top. But I think it’s also the local story. There is certainly, in our view, still some adjustment risk around BOJ policy,” Chan said.
In his inaugural briefing on Monday, new BOJ Governor Kazuo Ueda stressed his intention to “maintain unconventional monetary policies” to meet the central bank’s 2% inflation target, local media reported.
Ueda said it was “appropriate” to keep the bank’s current yield curve control (YCC) policy and negative interest rate policy.
Below Japan’s yield curve control policyshort-term interest rates are held at an ultra-dovish level of -0.1% and the yield on 10-year government bonds at 0.5% above or below zero.
The consumer price index in the United States in March turned out to be colder than expected, with some economists predicting that the Fed’s rate hike cycle could soon come to a halt.
The Japanese yen last traded at 133 against the US dollar in Asian trade on Thursday. A forecast of 120 yen to the dollar would mean the currency will strengthen by around 21% from the October 20 high of 151.94.
While it’s different to gauge what type of adjustment the BOJ will undertake and when it might take place, Chan said “the likelihood increases as we continue to move forward this year.”
“That could maybe move the goal to 10 years, maybe five years, maybe two years,” he postulated, saying that a “complete abandonment of politics is quite unrealistic at this stadium”.
As for when the potential setting might happen, Chan predicted it could come as soon as late April or June.
Total removal of YCC?
Similarly, Divya Devesh, Asia FX strategist at Standard Chartered Bank, estimated on Tuesday that markets could see the dollar-yen at 120 later this year.
However, instead of a simple adjustment, he predicts that the currency will continue to strengthen, driven by a complete overhaul of the YCC.
“Our base case is that we expect the Bank of Japan to essentially scrap its YCC at the June meeting…in its entirety,” Devesh said.
While he acknowledged that it was possible to remove the band altogether or widen it, he does not believe the central bank will undertake the latter.
“Whether [they] move it incrementally…markets will start speculating and markets will want to assess this now and not at the BOJ meeting, and it becomes a problem for the Bank of Japan,” Devesh explained.
“From the Bank of Japan’s perspective, it may be easier to get rid of the YCC.”
– CNBC’s Jihye Lee contributed to this report.