MUFG expects further JPY strength and downside risks for USD/JPY, driven by reversing global inflation trends, declining US yields, and BoJ rate hikes. While USD/CNY upside could exert short-term pressure on JPY, JPY is likely to weaken less than other G10 currencies due to its safe-haven status.
Key Points:
JPY Strength Driven by BoJ Policy Shift & Market Dynamics
BoJ's 25bp rate hike (to 0.50%) was the biggest increase since 2007, signaling a shift away from ultra-loose policy.Reversing global inflation trends and falling global yields reduce the previous USD/JPY bullish drivers.Trump Tariffs & USD/CNY Upside Pose Short-Term Risks
Initial optimism on tariffs faded, leading to renewed USD strength and potential near-term JPY weakness.If USD/CNY moves higher, some JPY selling pressure may emerge, though JPY should outperform other G10 currencies.Long-Term Drivers Point to USD/JPY Decline
Ultra-low Japanese rates were a major factor in USD/JPY rising from 115 to 160 in 2022-2023.With those conditions now reversing, JPY is likely to strengthen in the coming quarters.Conclusion:
MUFG maintains a bearish USD/JPY outlook, expecting JPY strength to accelerate as global inflation eases, US yields decline, and BoJ policy normalizes further. While short-term risks exist from USD/CNY upside, the broader trend favors USD/JPY downside in 2025.
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