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In a turn away from monetary policy, significant fiscal stimulus measures prompted the Bank of Japan (BoJ) to upgrade its economic outlook, and as such, supports a strengthening yen over the coming year, explained analysts at CIBC. They forecast USD/JPY at 104 by Q2 and at 101 by the fourth quarter. 

Key Quotes: 

“USD/JPY remains an important risk proxy for markets, and the extension higher reflects the market’s affinity towards risk assets so far this year. Despite some tensions in the Middle East in early January, equities continue to climb, with US indices reaching all-time highs. Additionally, rates are extending their sell off from late August lows, while curves continue to steepen.”

“In the near-term, the move higher in the 10-year JGB yield is disconcerting, considering how swift it has been. Historically, moves of that type are generally followed by an equally swift drawdown in equities, which should also lead to tactical downside in USD/JPY. Over the long-term, we remain constructive on risk, but factor rotation suggests that a supportive endogenous backdrop in Japan – infrastructure spending from the government should offset the drag from the sales tax over time – will work to keep USD/JPY anchored.”