The dollar advance versus the yen in March was the largest since November 2016 when Donald Trump won the US election. Economists at MUFG Bank forecast further upside for USD/JPY before the yen recovers.

MoF a distance away from any actual intervention

“We see the fundamental drivers that fuelled yen selling remaining over the coming months which could see new highs in USD/JPY before any recovery of the yen takes place.”

“While the US short-term yields are now richly priced for rate hikes, the FOMC hiking by 50bps in May and possibly again in June will help support front-end yields in Q2. Secondly, we expect crude oil prices to advance notably in Q2 with physical shortage of oil driving up the spot price. That will have a further negative impact on Japan’s trade balance. Thirdly, inflation expectations in Japan are elevated at level last seen in 2015 when USD/JPY was last trading above 120.00 and the BoJ’s monetary stance is likely to remain ultra-dovish.”

“MoF rhetoric voicing concerns will likely continue ahead of the Upper House elections. We doubt circumstances will arise for actual intervention by the MoF to halt yen selling. The rhetoric itself should create better two-way flows at higher USD/JPY levels, limiting the scale of upside potential from here.”

“A peak in short-term US yields may well be in place which will result in USD/JPY then beginning to correct lower.”