ABN Amro analysts predict that the recovery of the Yen will persist, but it requires patience. They examine the outlook for USD/JPY and EUR/JPY, both of which have begun to decrease.
The key factor driving the Yen’s rebound is speculation surrounding the Bank of Japan’s potential decision to hike the policy rate in March. However, previous rate hike expectations were dashed when the BoJ didn’t initiate a hiking cycle last year. Even if they start this month, the communication or pace of rate hikes might need to meet expectations.
Nevertheless, ABN Amro anticipates that the recovery of the Yen will endure. The narrowing of interest rate differentials between the US and Japan and the Eurozone and Japan is expected to push USD/JPY and EUR/JPY lower, although much of this has already been priced in.
The divergence in monetary policy—BoJ potentially hiking rates while the Fed and ECB cut—is favorable for the Yen. However, the ECB and Fed anticipate the bulk of the action, with ABN Amro foreseeing the BoJ’s hiking path to be very gradual.