Net importers of energy resources are facing serious trouble amid soaring oil prices. With Japan being one of them and the BoJ intending to preserve its ultra-soft monetary policy, the USDJPY is currently growing. Let’s discuss it and make a trading plan.
Quarterly fundamental forecast for yen
At the beginning of January, I forecast a rally of the USDJPY to 117-118 based on the divergence between the Fed’s and the Boj’s monetary policies and the US’ and Japan’s economic growth paces. The military conflict in Ukraine was supposed to delay reaching those targets, but it only increased the differential between the US and Japanese bond yields, pushing the greenback to its 5-year highs against the yen.
The Russian invasion of Ukraine raised gas prices to record values in Europe and oil prices — to 14-year peaks. The main “beneficiaries” are net exporters of energy resources while net importers were affected the most. The US belongs to the former, and Japan — to the latter. According to Bloomberg, Japan’s foreign trade negative balance went from ¥371 billion to ¥871 billion already in January. The situation may worsen in February – March, which will slow down the local economy or even drive it to recession. Etsura Honda, one of the creators of Abenomics, estimates that Japan might need new fiscal stimuli worth ¥10 billion to strengthen its fragile economy.
The BoJ also understands the problem, and Bloomberg experts do not expect any monetary policy changes from a meeting in March. What’s more, 53% of respondents believe no changes will be made in the next 12 months either. That’s twice as big as the number of economists that forecast policy normalization against a backdrop of Japan’s inflation rise, which will surely happen since Japan is part of the global system. Historically, wars boost consumer prices for a few reasons: military needs load economic capacity; sanctions and embargoes disrupt supply chains; governments and central banks maintain GDP growth using fiscal and monetary stimuli.
Forecasts for changes in BoJ monetary policy
Japan’s inflation is still far from 2%, but the US’ rose to 7.9%. So, the Fed will not only raise the federal funds rate in March but also tighten monetary policy at each of the next three FOMC meetings. Thus, the treasury yield is growing, the yield differential between the two countries is growing as well, and the USDJPY has every reason to rally. Mitsubishi UFJ and Morgan Stanley Securities expect to see the pair at 120 in 2022, while Mizuho Bank and TD Securities predict growth to 117 by the end of June. The derivatives market estimates the chance of USDJPY’s growth to ¥118 at 51% and to ¥120 at 29% in three months.
Quarterly trading plan for the USDJPY
Apart from the economic growth and monetary policy divergences, another important factor in the USDJPY‘s rally is a flow of capital from Japan to the US stock market on talk of US exclusivity. So, I upgrade my forecast for the end of June from 118 to 120, keeping March’s forecast at 117. My advice is to buy.
Price chart of USDJPY in real time mode
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