Goldman Sachs Revises Higher USD/JPY Forecast

The US bank has revised higher its USD/JPY forecast profile, see below for more details. The biggest negative for the yen will be the continued benign macro environment.

Goldman Sachs: "Not with a bang, but with a whimper; Revising our USD/JPY forecast. The Bank of Japan hiked rates for the first time in 17 years, and for just the fourth time since the introduction of the zero interest rate policy in 1999. While this marks another giant leap for the BoJ, we think it is a small step for the Yen, and one that is likely too tentative to overcome the broader macro backdrop. Fundamentally, as we discussed last week, we do not think the BoJ’s actions will prompt significant repatriation from Japan-based investors—that would need to come from a change in the returns available abroad. But, we also do not expect careful Fed cuts driven by cooler inflation to boost the Yen. If anything, the anticipation of adjustment cuts has reduced the probability of the recession risks that tend to activate the Yen’s safe-haven appeal, so we do not expect any compression in the forward rate differentials that tend to matter for JPY, even as the policy rate differential narrows a bit. While we expect Japan policy to continue to be sensitive to the exchange rate, it remains the case that the benign macro risk environment should weigh on the Yen over time. Given the recent changes in our Fed forecast, coinciding revisions to our US fixed income forecasts, and the relatively careful BoJ policy communication, we are shifting our USD/JPY forecast path higher again. We now expect USD/JPY to trade around 155, 150, and 145 in 3, 6 and 12 months (vs 145, 142 and 140 previously)."