Stronger Yen Continues Gain

JPY continues to gain on risk averse trading. USDJPY has fallen sharply to 109.90 from 110.95 on persistent selling pressure. Outside of the obviously macro environment risk which are generally 'media-cycle' led suggesting short-term volatility and swings, and there is the weak Japan economic fundamentals.

Recent inflation slowdown is clearly disappointing for the BoJ and continues to present a significant challenge for the central bank. Japanese core inflation is well below 1% which is the lowest in the G10.

Even the weaker JPY is unlikely to generate meaningful inflation, forcing the BoJ to lower its inflation forecast again. Barring a momentous economic acceleration or positive inflation shock, it’s unlikely that the BoJ will meet its 2% target.

We continue to see the BoJ moving away from stick adherence to monetary policy steering within Abenomics. The BoJ appears surrendered on reaching its inflation target. The closer we move toward the BoJ end-game the more markets will be pricing in a strong JPY. Deceleration of BoJ focus on normalisation and lagging EUR suggest a constructive trade on long EURJPY.

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