We think the long-term yield gap is not useful for long-term analysis for USD/JPY because the correlation tends to shift often. So, the current correlation cannot be useful for analyzing USD/JPY after the BoJ changes monetary policy significantly. In fact, UST-JGB 10yr yield gaps were around 180bp in all 3 phases: 1) before the BoJ introduced negative interest rate policy (shown as blue plots in Exhibit 2), 2) after introducing NIRP but before introducing quantitative easing policy (orange plots), and 3) after introducing QE (light green plots). However, USD/JPY levels differed by more than 20 yen among those periods (Exhibit 2)
As we are already seeing, the correlation has started shifting upward. Even though the BoJ raised the ceiling of JGB, the short-term interest rate gap remains the widest in two decades. If JPY fails to appreciate after the BoJ move, short-term JPY longs will be forced to unwind. Importers will also need to sell more JPY in the coming months. Therefore, we maintain our 1Q24 USD/JPY forecast of 133.
- J.P. Morgan FX Strategy
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