We expect the Bank of Japan (BoJ) to maintain its 'QQE with yield curve control' policy unchanged at its monetary policy meeting ending on 21 September.
Political uncertainty is likely to increase in Japan where the focus will in particular centre on whether PM Abe calls for an early general election, and not least whether BoJ governor Koruda will be re-appointed to lead the BoJ for another five years when his current term ends in April 2018.
In our main scenario, we expect the BoJ to keep its policy unchanged throughout our 12M forecast horizon, assuming that BoJ governor Koruda is re-appointed.
We look for USD/JPY to remain range bound in the near term as political uncertainty (both in relation to North Korea and domestically in Japan) is likely to counter most of the JPY depreciation potential. Longer term, we expect USD/JPY to increase, targeting 114 in 3M and 116 in 6-12M.
Tactically, we prefer to stay sidelined USD/JPY as highly unpredictable political risks leave a less attractive risk/reward. EUR- and DKK-based corporates should hedge JPY income with FX forwards.
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