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The Japanese yen is by some distance the underperforming currency in the G10 space this week. According to economists at MUFG Bank, JPY is set to underperform versus non-dollars.

Japan to lag behind in a backdrop of global reflation, keeping the yen under downward pressure

“While negative news in Japan that depresses inflation expectations can provide support for the yen, the monetary stance of the BoJ for a prolonged period coupled with expectations of extended fiscal support and general strong risk appetite are all combining to keep the yen weak.”

“Japan may well be heading for another technical recession with the government set to announce an extension of the current State of emergencies through until 20th June – just 5 weeks ahead of the Olympic Games commencing. This will likely mean the BoJ responds by extending its pandemic relief program beyond the current September deadline according to reports by the Nikkei newspaper. So the reflation theme globally that is underway in the US, Europe and the UK is likely to exclude Japan which will likely lag behind as it adopts caution to ensure the Olympic Games can proceed.”

“Given our view of broader USD weakness, the scope for yen depreciation is far greater versus non-dollar currencies. While the cross-border portfolio flows do not yet show pronounced outflows since the start of the fiscal year, the speculative market has quickly positioned for yen weakness to play out.”

“We do expect cross-border outflows from Japan to pick up. There have been net sales of foreign bonds in three of the last four weeks and total purchases this fiscal year stands at just JPY1.4 trn. With long-term yields in the US more stable now, we see conditions as ripe for a pick-up over the coming weeks.”