FXStreet notes that the Japanese yen has risen about 4.4% against the US dollar so far this year probably because of the market’s Risk On-Risk Off (RORO) fixation. In 2021, economists at HSBC believe FX will shift away from RORO behaviour to relative economic growth. With a benign domestic growth outlook and probable outflows, they expect a less resilient JPY in the year ahead. 

“We believe RORO will be superseded in 2021 by a greater fixation on economic activity, in particular, the relative experience of different countries and their ability to secure a recovery amid the uncertainty of COVID-19.”

“Japan’s real GDP for Q3 2020 rose 5.0% over the previous quarter on a seasonally adjusted basis, which was better than expected. But our economists cautioned that the level of GDP remains well below the pre-COVID-19 level. ...the Bank of Japan will likely maintain its ultraloose policy stance in the foreseeable future, while new Prime Minister Suga has ordered the Cabinet to come up with a third supplementary budget earlier this month that could exceed 3% of GDP.”

“With longer-dated US yields rising again (relative to the previous quarter), the discussions around Japanese investors hedging their buying of foreign assets, or even slowing them, look likely to fade. Such outflows are likely to persist and contribute to JPY weakness. All this points to a less resilient performance from the JPY, which we see USD/JPY rising gradually in the year ahead.”