The exchange rate, after falling sharply from 162 in early July to 141.7 in early August, has recently stabilized within a range of 143.5 to 149.5.
In a note to clients on Wednesday, UBS analysts said: “We believe this range is likely to persist over the next three months, for several reasons.” However, looking beyond 2024, UBS expects a gradual decline in the USD/JPY pair, with the pair potentially reaching 138 by September 2025.
The central bank maintained its USD/JPY forecast at 147 for December 2024, 143 for March 2025, and 140 for June 2025, while introducing a new target of 138 for September 2025.
This expected downward trend is due to several factors. First, speculation in the foreign exchange markets on leverage has turned into net long yen buying, suggesting that short yen positions could be rebuilt if global risk sentiment stabilizes.
Additionally, with US interest rate markets pricing in a 100bp rate cut from the Fed by the end of 2024, the downside potential for USD/JPY is somewhat limited in the near term.
Furthermore, UBS highlights that the USD/JPY pair has approached the real spread between the US and Japanese 10-year yield, which “may limit further downside potential for the exchange rate.”
“The downside risk to our USD/JPY forecast of 147 by end-2024 is that upcoming US economic data (particularly the September 6 NFP) could disappoint, which could lead to renewed US recession fears and a retest of the USD/JPY lows of early August at 141.7,” the bank added.
Moreover, Japan’s upcoming Liberal Democratic Party leadership election on September 27 could cause some volatility, especially if Shigeru Ishiba, a candidate seen as yen-positive, is elected.
“Despite our near-term view of stability in USD/JPY, we expect a downtrend in the medium term, targeting 143 in March 2025, 140 in June 2025 and 138 in September 2025,” according to UBS data. “With the Fed likely to continue to cut rates systematically over the next 12-18 months, coupled with the Bank of Japan gradually raising rates, narrowing US-Japanese yield differentials are likely to drag USD/JPY lower in the medium term.”
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