The USD/JPY pair is now back trading above 114.00. With no end in sight to easy Bank of Japan (BoJ) monetary policy, and yield curve control extended, economists at CIBC Capital Markets look for yen weakness ahead.

Medium-term outlook for a weaker yen into 2022

“The perpetuation of an ultra-easy BoJ policy stance is set to leave Japan alongside the eurozone and Switzerland as extending long term policy inertia, a scenario which should continue to leave the JPY on the defensive.” 

“Post the re-election of the LDP, we can expect another round of fiscal stimulus. While we expect Q3 weakness to give way to a solid rebound in Q4 GDP as the economy re-opens, the extension of yield curve control will see a sizeable widening in USTJGB 10 year spreads, providing the rationale for ongoing outflows of capital looking for higher returns overseas.” 

“One risk to our weaker yen scenario that bears watching is the sheer scale of existing JPY shorts. The scale of the position skew risks a JPY corrective rally should risk sentiment prove to become materially compromised into year-end, but we would still maintain our medium-term outlook for a weaker yen into 2022.”