JPY: BoJ will be reluctant to raise JGB yield target too soon – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has been one of the best performing currencies so far this year as it has reversed excessive weakness at the end of last year.

Key Quotes

“Our short-term valuation model provided an accurate signal that yen weakness had overshot fundamentals in the near-term. USD/JPY now appears more fairly valued trading between the 110.00 and 115.00-levels. The recent pullback in US yields and increased focus on the shift to more protectionist trade policies under President Trump has helped the yen to rebound. The monetary policy divergence trade between the Fed and the BoJ which helped USD/JPY rise sharply following the US election has taken a breather.”

“There have been some positive developments on that front overnight although not sufficient to trigger a reversal of the recent strong yen trend. Bloomberg has reported that BoJ officials would rather be late than early in raising their 10-year JGB yield target from around 0% according to people familiar with their discussions. Officials reportedly see considerable risks in moving too quickly and are mindful of policy exits in 2000 and 2006 which were criticised for prolonging deflation. Market pressure on their JGB yield target has eased over the last month.”