Goldman Sachs: Pondering An Early Exit

Goldman Sachs note that “the BoJ’s apparent greater flexibility on current monetary policy has shifted the balance of risks further in favour of the JPY and has helped drive USD/JPY lower in recent weeks on top of the softer-than-expected inflation news in the U.S.”

• “How much lower could USD/JPY go in a scenario of a nearer-term exit from YCC? We have long been arguing that the bigger driver of the cross should be U.S. rates rather than domestic monetary policy, though our estimates suggest we could see another USD/JPY sell-off of roughly 3% - or a decline to levels just below Y125.”
• “While our economists expect the BoJ to keep YCC in place with possible further tweaks to improve its sustainability, the increased risk of a complete exit means we see more limited room for USD/JPY upside and, as a result, recently revised down our forecast path.”
• “That said, our economists’ base case outlooks for the U.S. and Japan in the year ahead - i.e., no U.S. recession, higher U.S. rates, and no BoJ exit from YCC - together still argue for phases of JPY weakness before a more sustained period of appreciation, likely once the peak in U.S. rates becomes clear.”