The Japanese yen is an anti-cyclical and “safe-haven” currency and should outperform against slowing global growth momentum. However, it is also highly sensitive to the Fed’s impending policy normalisation, overshadowing its “safe-haven” allure. All in all, USD/JPY is likely to remain roughly stable before slowly grinding higher in 2022, in the view of economists at HSBC.
JPY may not be as good a “safe haven” as USD when weaker risk appetite is due to expectations of Fed’s policy normalisation
“On the one hand, the JPY is an anti-cyclical “safe-haven” currency, like the USD is. Hence, slower global growth and weaker risk appetite should drive the JPY stronger. But, on the other hand, the JPY is very sensitive to rising short-term US Treasury yields which reflect market expectations of changes in the Fed’s monetary policy. The JPY is a very low-yielding currency, thereby being highly susceptible to depreciation amid rising US interest rates.”
“We believe the JPY’s sensitivity to US yields is likely to overshadow the JPY’s role as a relative ‘safe haven’ at least when measured against the USD, which has a similar risk personality.”
“We expect the JPY to outperform many other currencies, but not necessarily the USD. We see USD/JPY remaining roughly stable for the rest of the year, before slowly grinding higher in 2022 once the Fed’s tapering commences and the focus switches to its policy rate’s lift-off next.”
“External factors drive our view on USD/JPY, but we note that several domestic factors are suggesting that there is no need to be too bearish on the JPY. For example, the Bank of Japan’s balance sheet is already in the midst of tapering and Japanese residents’ portfolio outflows have slowed.”