- BNP Paribas (BNPP) anticipates that the Bank of Japan (BoJ) will keep its policy unchanged at tonight’s meeting but will widen the yield curve control (YCC) band to +/-100 basis points in July. According to BNPP, this tightening in monetary policy should be supportive of the Japanese Yen (JPY).
- BNPP also foresees the potential for U.S. yields to decline from current levels as the Federal Reserve concludes its tightening cycle. The bank believes that USD/JPY is likely to be particularly sensitive to these movements in U.S. yields.
- Additionally, BNPP notes that there has been verbal resistance to Yen weakness from Japan’s finance ministry, which could introduce two-way risk for USD/JPY and limit the potential for significant further gains in the currency pair.
- Reports from life insurers released in April indicate that the majority of onshore life insurance companies plan to reduce non-FX hedged foreign-bond holdings. BNPP expects a similar repatriation by pension funds of foreign-debt exposure once the YCC band is widened.
- While BNP Paribas has revised its USD/JPY forecasts higher to account for a higher Fed terminal rate and a later widening of the BoJ’s YCC, the bank continues to project a downward trend in USD/JPY. BNPP now forecasts USD/ PY to fall to 130 by the end of 2023 and further to 123 by the end of 2024, up from its previous projections of 127 and 121, respectively.
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The Bank of Japan statement is expected some time in the 0230 to 0330 GMT (10.30 pm – 11.30 pm US Eastern time) time window. Bank of Japan Governor Ueda will speak at 0630 GMT.
This article was written by Eamonn Sheridan at www.forexlive.com.
