The JPY was the worst-performing G10 currency in April, amid widening US-Japan rate differentials. Economists at HSBC still see further JPY strength ahead, supported by its ‘safe haven’ status and other local factors.

Further strength ahead

“We think the JPY can bounce back, not least because an ongoing BoJ’s policy review would not preclude a tweak to its yield curve control (YCC) policy, even if it may come a little later than previously expected. In addition, Japan’s core inflation remained sticky in March and, when energy is excluded, underlying inflation accelerated to a 41-year high of 3.8%. While it may still be a stretch to say that Japan now has an inflation ‘problem’, it should be fair to say that some deflation-era policies may no longer be appropriate.”

“The future monetary policy divergence between the Fed and the BoJ, in addition to other local factors (like current account improvement), should support our rationale for JPY’s appreciation later in the year. We also think that the JPY is likely to be viewed as a cleaner ‘safe haven’ than the USD, for any US-centric ‘risk off’ dynamics, such as the US debt ceiling stand-off and US banking sector concerns.”