USD/JPY Monthly Fundamental Forecast – November 2015

Outlook and Recommendation

The USD/JPY dipped on the last session of the month to trade at 120.62 as the US dollar dipped, but prior to the close of the month the Bank of Japan held rates and policy. The pair ended dead center of its monthly trading range. The Bank of Japan is in a similar situation as the ECB and thus will want to make sure that its monetary policy is significantly more accommodative than the one in the US.  Core inflation rises again after the base effect of the VAT-hike dropped out, it reached 0.8% in August, which was an upside surprise.

Yen strength persisted on the back of Asian safe haven flows and the Bank of Japan refraining from further monetary policy easing • Similar to the rationale regarding ECB behavior depending on the Fed policy, analysts think that the risk of more quantitative easing by the BoJ has risen slightly as of late.

The Japanese yen (JPY) outperformed in September; its modest 1.2% rise is a result of haven-driven gains that are simultaneously restrained by a shift in the balance of risk toward the outlook for Bank of Japan (BoJ) policy. Positioning risk for JPY is limited, with a modest net short CFTC position of $2.5bn as of September 22nd. Fundamental risk for JPY lies to the downside, however we acknowledge ongoing vulnerability to gains in periods of broader market turbulence.

In mid-September, Standard & Poor’s downgraded Japan’s sovereign credit rating by one notch to “A+”, assessing that the government’s strategy to revive economic growth and end deflation has not been successful enough to support the prior rating level. Fitch and Moody’s lowered their ratings on Japan to “A” and “A1” in April 2015 and December 2014, respectively. Despite Japan’s private sector wealth, large institutional savings, strong external position, and stable financial system, credit quality is weighted down by the country’s public sector indebtedness (close to 250% of GDP), muted economic performance, and unfavorable demographics. Japan’s ultra-accommodative monetary policy stance will remain in place for the foreseeable future.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

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