On Monday, UBS released a report indicating a potential shift in the trajectory of the USDJPY currency pair. Analysts at UBS suggest that the significantly weakened Japanese yen might be ready for a reversal. This outlook is based on growing concerns among Japanese policymakers and businesses about the negative impact of the yen’s depreciation on the country’s economy.
The report references a recent survey conducted among local small and medium-sized enterprises (SMEs), which employ about 70% of the workforce and constitute a significant employment sector in Japan. The survey results show that 35% of the participants experienced negative sales effects due to the weak yen, while a substantial 63.9% reported adverse impacts on their profits. Additionally, half of the surveyed companies indicated that a “suitable level” for USDJPY would be between 110 and 120, contrasting with the higher levels recently observed.
UBS points to the Bank of Japan (BoJ) meeting on June 14 as a critical event that could influence the yen’s direction. The firm interprets the BoJ’s tolerance of rising 10-year Japanese Government Bond (JGB) yields, which have reached 1%—an eleven-year high—as a potential sign of a hawkish policy shift. UBS forecasts that BoJ Governor Ueda might signal the start of an interest rate hike cycle, potentially raising the policy rate from 0-0.1% to 0.25% in July, with two additional 25 basis point hikes possibly occurring in 2025.
Considering the potential for a more hawkish stance from the BoJ and signs of slowing in U.S. employment and inflation data, UBS maintains a bearish outlook for USDJPY. They believe the currency pair is likely to peak around 160, with a medium-term decline anticipated. The report outlines potential limits for USDJPY, noting that a rise to the 157.5-160 level could trigger currency intervention, while a drop to the 150-152 range might attract demand for carry trades. However, UBS also acknowledges that if U.S. economic data does not show signs of moderation, USDJPY could remain at elevated levels.
Source: investing.com
