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(Z1) Shallow Bounce


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J.P.Morgan suggest that "the short-term policy backdrop is unlikely to change materially for the yen regardless of a rise in political uncertainty. Expectations for a supplementary budget in response to the recent sharp rise in infections and expansion/extension of Japan's state of emergency have been running high for some time; on the flip side, major monetary policy settings are effectively on ice. The short-run outlook for JPY, and particularly USD/JPY, should therefore remain a closely derived function of the path of long-end yields rather than idiosyncratic domestic factors."

  • "But a return to the era of revolving-door politics could, over the longer term, bolster what is already a JPY-supportive flow backdrop. Prior to PM Suga, PM Abe's comparatively long-held tenure stood in stark contrast to the dynamic through the 1990s and the period between 2006-12, both of which were characterized by a revolving door of prime ministerial departures - one virtually every year. These periods were also marked by episodes of broad JPY appreciation. That the JPY TWI tends to strengthen amid sustained domestic political instability may seem counterintuitive. But it speaks to influence of Japanese capital flows on the yen: outbound investment from Japan, particularly corporate M&A outflow, tends to slow during periods of uncertainty in domestic policy and politics."
  • "The yen's cheapness to its historical relationship with real rates spreads is something that has persisted through much of this year amid the collapse in U.S. real yields. Indeed, the dislocation in USD/JPY versus the U.S. Tsy-JGB 10-Year spread deflated by 10-Year breakevens screens as high as 20%. This degree of mispricing looks all the more striking given a fundamentally bullish BoP backdrop, which reflects a sharp reduction in the pace of Japanese outbound investment, and recent flip toward outright net repatriation. The yen's cheapness to fair value, combined with Japan's solid basic balance, is not a mixture we think can last indefinitely; and the potential for another sustained period of political instability could further bolster the flow backdrop for JPY over the longer term."