The USD/JPY pair is surging as YCC constrains the ability of Japan’s 10-year yields to keep pace with higher US yields. Meanwhile, the Bank of Japan may deliver some manoeuvrability at the margin at the upcoming review, but it may also mix in dovish actions. Economists at HSBC  see USD/JPY going slightly higher over the near-term, before correcting in the second half of the year.

Key quotes 

“The BoJ is currently doing a review of its monetary policy easing and will announce the findings on Friday. The aim is to make monetary policy easing more sustainable for the long haul, as the 2% inflation goal still looks rather elusive, with progress being derailed by the pandemic. We believe the review may cause some temporary volatility in USD/JPY.” 

“We can envision USD/JPY falling in a knee-jerk reaction, if the BoJ is interpreted as not being sufficiently dovish (by widening the YCC range, tapering exchange-traded fund (ETF) purchases, and making only minor tweaks to the Negative Interest Rate Policy (NIRP).” 

“USD/JPY may rise further over the near-term, if the BoJ is seen as trying to be even more accommodative on its monetary policy easing (by leaving the YCC range unchanged and making a deeper NIRP a credible threat).”

“Unless the BOJ takes radical action, (i.e., some kind of acceptance of Modern Monetary Theory (MMT), for example, direct financing of the government’s fiscal deficit) we doubt there will be lasting implications for the exchange rate.”

“We believe USD/JPY will fluctuate with an upward bias over the near-term, before correcting slightly in 2H21. The correction could come about as more economies make progress with their vaccination programmes, thereby narrowing the US cyclical advantage, for example.”