Fundamental Forecast for Japanese Yen: Bullish

The Japanese yen weaken against most of its major counterparts as currency traders increased their appetite for yields, and the rise in carry interest may continue to bear down on the currency as risk sentiment continue to dictate price action in the foreign exchange market. However, we may see a shift away from risk-taking behavior as the Federal Reserve unwinds the additional $600B in quantitative easing, and the central banks across the industrialized nations may continue to gradually normalize monetary policy in the second-half of the year as inflation becomes a growing concern.

Although some advanced economy continue to face ‘vulnerabilities,’ the Bank for International Settlements said world policy makers need to start raising interest rates in its annual report, and warned that monetary stimulus may need to be withdrawn faster than historically seen as price pressures are ‘rising rapidly.’ The BIS went onto say that the prolonged period of ‘loose’ policy could distort the financial markets, and argued that ‘need for continued extraordinary monetary accommodation has faded.’ As heightening price pressures dampen purchasing power for households, global policy makers may adopt a hawkish policy stance in the second-half of the year, and central banks may continue to wind down their balance sheets over the coming months in order stem the risk for inflation.

In light of the recent comments by Bank of Japan Governor Masaaki Shirakawa, the board looks poised to preserve its wait-and-see approach as he warns about the adverse effects of prolonged period of accommodative policy, and risk may subside going forward as central banks across the global look to withdraw monetary stimulus. Should risk taper off in the following week, the shift in trader sentiment is likely to increase the appeal of the low-yielding currency, and the Japanese Yen may regain its footing in July as carry interest falters.

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