Investing.com – Citi has updated its Q3 2020 outlook, providing insights into the pair’s medium- and long-term trajectory.
The bank’s strategists assert that the recent decline in the yen’s value is largely driven by a backward-looking narrative linked to Japan’s digital account deficit. However, they point out that this narrative of structural weakness in the yen is a “fallacy,” as the currency’s current situation is more nuanced.
In its medium-term baseline forecast, Citigroup suggests that the yen could weaken, which could push the USD/JPY pair towards 150 by the end of 2024.
However, looking ahead, strategists warn that the pair could drop below 140 in early 2025, and continue its downward trajectory to close near 130 by the end of next year.
In explaining this forecast, Citibank Group points out that various factors could lead to a reversal of the recent yen weakness.
These include the potential for Japanese companies to repatriate their foreign earnings, which could put upward pressure on the yen. In addition, travel surpluses and increased returns on intellectual property are improving Japan’s current account balance, which could support the currency’s strength over time.
Citi also challenges the prevailing view that Japan’s digital account deficit reflects a long-term structural weakness.
In this regard, Citigroup strategists noted that “in our view, this is essentially a trend-following argument that seeks a backward-looking narrative for the yen’s depreciation that has been ongoing over the past decade.”
“This perception is based on a distorted story about the true picture of Japan’s balance of payments, and it may take several years to correct this distortion. During that time, short yen positions held by a range of economic entities will remain, and there must be persistent market forces that will reverse these positions.”
However, Citi remains cautious about the near-term outlook for the yen. The group recognizes that important factors, such as portfolio investments and the broader fiscal balance, will continue to influence USD/JPY volatility.
They also warn that the pair remains sensitive to marginal changes in market conditions and flows.