Japanese Yen at Risk for Further Losses on Dovish BoJ Governor Kuroda
Fundamental Forecast for Japanese Yen: Bearish
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The Japanese Yen continued to give back the advance from May, with the USDJPY climbing back above the 99.00 handle, and the low-yielding currency may face additional headwinds in July should the Bank of Japan (BoJ) show a greater willingness to further embark on its easing cycle. Although the Tankan index is expected to highlight an improved outlook for the Japanese economy, the fundamental developments coming out of the region may have a limited impact on the Yen as central bank Governor Haruhiko Kuroda is scheduled to speak at the branch managers meeting on July 3.
Although the Japanese Consumer Price report topped market expectations, Japanese Finance Minister Taro Aso pledged to take the necessary steps to achieve the 2% target for inflation, but alluded to the fact that fiscal policy alone cannot support economic growth amid the ballooning budget deficit. In turn, the BoJ may come under increased pressure to further embark on its easing cycle, but there seems to be a growing rift within the board amid the mixed commentary coming out of the central bank. Indeed, Deputy Governor Hiroshi Nakaso argued that further monetary support is not needed at the current juncture as the economy returns to growth, and we may see the BoJ stick to the sidelines at the July 11 meeting as the central bank continues to assess its impact on the real economy. Nevertheless, Mr. Kuroda may continue to strike a dovish tone for monetary policy as he aims to encourage stronger recovery in Japan, and the fresh batch of central bank rhetoric may rattle the Yen should the central bank head highlight a greater willingness to implement more non-standard measures over the coming months.
As the USDJPY carves out a higher low in June, we may see a more meaningful run at the 104.00 figure in the days ahead, and will look to buy dips in the exchange rate as the BoJ keeps the door open to expand its balance sheet further. On the side of the coin, growing discussion at the FOMC to taper its asset-purchase program should also limits the downside for the USDJPY as a growing number of Fed officials see scope to scale back on quantitative easing, and the deviation in the policy outlook continues to cast a bullish forecast for the dollar-yen as we anticipate the BoJ to carry its easing cycle into the second-half of the year. - DS