USD/JPY should rise to 120 by end-2017 - Nomura

Research Team at Nomura explains that if the Fed raises rates in December and carries out two additional rate hikes in 2017, as Nomura’s economists expect, USD/JPY will likely reach 120 by end-2017.

Key Quotes

“USD would tend to strengthen more in the latter half of the year, when we would know more about the Trump administration’s fiscal policies. At the same time, there is considerable uncertainty about the US’s economic measures in 2018, and at this point we expect a neutral level of 114 at end-2018. For USD/JPY to stay above 120, we believe the US economy, which is already entering the last stage of its recovery, has to show a significant rise in productivity.”

“BOJ’s yield curve control to support JPY depreciation

Although playing a secondary role, Japan’s fundamentals should also support a rise in USD/JPY, in our view. The BOJ’s yield curve control measures have had a remarkable effect on keeping yen interest rates stable/low levels even as yields rise globally, and as the gap between yields widens, this is expected to weaken JPY. If USD/JPY nears 120, Japan’s inflation rate would likely rise to the mid 1% range, possibly spurring expectations in the market that the BOJ would taper its asset purchases. However, we do not expect inflation to exceed 2% as an underlying trend, and the BOJ is unlikely to take a hawkish stance during Governor Kuroda’s term (which ends in April 2018).”