Amidst the fourth COVID-19 wave, a mixture of ultra-easy monetary policy and net JPY outflows underline yen weakness ahead, Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, reports.
See – USD/JPY: Dollar weakness vs. yen weakness, three scenarios for the pair – MUFG
Domestic investors losing appetite for domestic paper
“While global activity assumptions have generally moved higher lately, Japan faces continued domestic headwinds. A fourth wave of Covid has been met with a 3rd state of emergency. the newest measures, broadened from an ingenious four prefectures, will compromise high-frequency data and underline that by Q2, the economy are going to be back during a technical recession.”
“Amidst ongoing threats to the staging of the Olympics, domestic surveys reveal overwhelming support for postponement or cancellation. The weakening growth trajectory has forced the BoJ to acknowledge that they’re going to miss their CPI target by the top of financial year 2023. If so, Governor Kuroda will have presided over a decade of missed inflation targets.”
“The weak growth environment has encouraged LDP lawmakers to start to debate the choice of yet one more fiscal package, although the lower house election within the autumn may get within the way. Discussion of the potential purchasing of foreign bonds underlines moves to cheapen the JPY. But private capital flows will add an equivalent direction in any event. With nominal yields set to be compromised by ultra-easy policy, we will expect domestic investors to still look for higher-yielding foreign assets. the mixture of ultra-easy policy and net JPY outflows foretells JPY weakness ahead.”