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USD/JPY has moved up sharply in recent days, extending gains over the last month to be testing highs in around a year, driven mostly by a rise in US yields and ongoing expectations that there will be no significant change in BoJ monetary policy for some time, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.  

Key Quotes

“The gains may also reflect a modest recovery in emerging market assets and currencies in recent weeks.”

“Perhaps some of the weakness in JPY may reflect under-performance in Asian currencies, led by a weaker CNY related to tariff concerns.”

“There may be a variety of motivations for a weaker JPY.   But it is difficult to say there is a clear fundamental driver for a weaker JPY.”

“There are reasons to be cautious about selling JPY at these levels.   Japan may be closer to achieving its inflation goals than generally perceived.   The economy appears to be operating above its potential with no output gap, and inflation is trending higher.”

“Core CPI (excluding fresh food and energy) in Tokyo rose to 0.7%y/y in September to a high since April 2016.”

“The Japanese equity market has significantly out-performed other national equity markets in the last month, supported in part by a weaker JPY.   At some point global investors may see the risk-reward favours buying Japanese equities unhedged, generating support for JPY.”