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Yujiro Goto, Research Analyst at Nomura, points out that USD/JPY broke above 113 and is trading at its highest since early January and JPY buying to hedge against an escalation of the trade war is also likely to moderate for now.

Key Quotes

“In terms of domestic investor flows, we are sceptical of aggressive USD buying from lifers to lower their FX hedge ratio at the recent level of USD/JPY, but aggressive foreign equity purchases by Japanese investors are attracting market interest.”

“As JPY weakens, market interest in any reaction from the BOJ is rising gradually.”

“If the Bank reduces the amount of JGB purchases, any short-term market reaction to the stealth tapering is worth monitoring. As USD/JPY has traded strongly, short-term profit taking and USD/JPY dip are possible.”

“If the muted reaction continues immediately after the stealth tapering announcement, dip-buying demand should emerge and the trend of USD/JPY appreciation would sustain further.”

“We also view the July BOJ meeting as an important event risk for JPY trading. We believe the medium-term implication of the July meeting is JPY negative, while we monitor for any possible measures to alleviate negative side effects.”

“For this week, we are also looking to weekly international portfolio investment flow data on Friday, as investor interest in active Japanese investment in foreign equities is rising. If Japanese foreign equity buying remained aggressive last week, it would be viewed as a sign that the room for dip buying is limited in the near term.”