USD/JPY plunged on surprise Yield Curve Control modification. Economists at HSBC expect some level of USD/JPY weakness by end-2023 but downside risks may be emerging.

Policy tweak should buy the BoJ some time

“It is possible that market participants may anticipate more dramatic policy changes by the BoJ in 2023, for example, exiting negative interest rate policy (NIRP) or even abandoning YCC, but we think the policy tweak should buy the BoJ some time.”

“The next development to watch now is life insurance companies’ FX hedging. If these companies raise their FX hedge ratio, that could also cause USD/JPY to fall sharply, like in 1Q-3Q 2016.”

“We expect some level of USD/JPY weakening by end-2023 but downside risks are clearly emerging.”