Mizuho says the Bank of Japan will accept a weaker yen in the near term, and will strengthen it once the bank tightens policy, perhaps as early as the second quarter.
Mizuho says that while the Fed, European Central Bank and Bank of England have not yet fully acknowledged that interest rate cuts are on the horizon, the Bank of Japan wants to avoid making a surprise pivot because it could disproportionately increase Japan’s appreciation pressures. Unbundling yield and carry will work together to amplify forex movements (yen strength). Therefore, the Bank of Japan will not rush to adjust policy that could be interpreted as a tightening, and concludes:
- Some additional JPY weakness now may be a necessary trade-off to avoid inappropriate and unwanted JPY appreciation later.
- We expect a range of 146-150 in the coming months with increased volatility.