Japan remains the worst performing G7 economy after the end of the COVID program. This means that there is still scope for catching up with Western economies. The propensity to consume has not yet returned to normal there, and the new rise in the number of COVID infections may further hamper demand as it will affect the consumption of services.
monetary policy
The Bank of Japan (BoJ) has fiercely defended its control of the yield curve in the face of global pressure to increase profitability. The additional supply of the Japanese yen (JPY) in the market added pressure to the currency. Due to the fact that long-term yields fell slightly again, the pressure on JPY also eased, which puts the BoJ in a more comfortable position. The weak yen continues to weigh on inflation in the economy, but the underlying price pressure remains at just 1%. With the inflation target of 2% and a consistent breach of it since the launch in 2013, Danske Bak economists expect the BoJ’s accommodative policy stance to remain valid for the foreseeable future.
External balances
Japan has a current account surplus. Over the past year, however, it has deteriorated significantly as Japanese trading conditions have plunged along with the yen and soaring energy prices. This also made the trade balance negative for over a year, which is also due to the closed tourism sector. Danske Bank economists believe the USD / JPY risk is due to new commodity and energy price increases that will boost inflation and global profitability. If the global slowdown turns into a true recession, flatter yield curves and cheaper energy will drive USD / JPY down. As Japan’s economic recovery continues to be hampered by COVID, domestic inflation is likely to remain modest. Thus, the key drivers of USD / JPY remain the outlook for the global economy and the energy crisis, Danske Bank economists point out.
Jen will make up for some of the losses
Looking further ahead, they expect that the pressure on JPY will decrease, and as a result they forecast a decline in the USD / JPY pair to 134.00 in the next month, 133.00 in the first half of the year and 125.00 in the next year.
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