The yen could surge to be as strong as ?85 per dollar if the market witnesses a combination of full-blown policy normalization by the Bank of Japan and an easing cycle from the Federal Reserve.
That¡¯s the view outlined by Deutsche Bank in a note to clients Monday. Such a move would amount to an appreciation of close to 60% from the yen¡¯s current level, which on Tuesday was around ?136 to the dollar.
The bank judges that right now the Japanese currency is around 30% cheaper than its ¡°equilibrium fair value,¡± a level that the analysts peg around ?100 per dollar. While noting that there are other factors at play in the valuation of the yen, the analysts reckon it could hit that level if there were to be a total normalization of policy by the Bank of Japan, which is still holding its benchmark near zero and engaging in unorthodox measures such as yield curve control.
The possibility of the yen reaching ?85 is contingent upon there also being an easing of U.S. central bank policy. That is not presently the baseline scenario being priced in by the market, with recent shifts in bets on the Fed indicating a move toward the idea that rates might stay higher for longer.
The outlook for Bank of Japan policy is in flux right now, with incumbent Gov. Haruhiko Kuroda set to hand over the reins of leadership following his final scheduled policy meeting, which takes place this week. The incoming boss Kazuo Ueda is unlikely to change policy before the third quarter of this year, according to Mizuho Securities in Tokyo. But with global inflation elevated, pressures have been mounting for the BOJ to eventually move away from its longstanding policy of easy money.
Deutsche Bank estimates that the fair value for 10-year Japanese government bond yields is around 1.5% to 1.6%. That¡¯s where analysts would expect yields to ultimately settle if the BOJ suspends yield curve control and wound down quantitative easing, although in the case of ¡°full-scale¡± normalization they could climb to somewhere between 2% and 2.5%, according to Deutsche Bank.
The yen received a major boost in December when the BOJ¡¯s last decision of 2022 laid the groundwork for potential tightening, extending a recovery in the currency from the multidecade lows it touched in October. It has backtracked since touching a peak in mid-January, and is presently down around 3.6% for 2023, the second-worst performer among Group-of-10 currencies.
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