While global central banks are moving to tighten policy, the Bank of Japan (BoJ) remains in almost splendid isolation. In the view of economists at CIBC Capital Markets, 10-year UST-JGB spreads risk testing 300bps – which should allow USD/JPY to test the 135.15 high prior to any JPY reversal.

Ultra-easy BoJ policy to weigh on JPY

“BoJ Governor Kuroda continues to suggest that a weak JPY is an overall positive for the economy. That suggests that in the absence of a material MoF pushback, which is only likely if markets risk becoming disorderly, we expect the path of UST-JGB spreads to remain the primary determinant of USD/JPY.”

“As 10-year UST-JGB spreads risk testing towards 300bps, this supports the notion of the 2002 USD/JPY high at 135.15 being tested prior to any JPY reversal.”