Synopsis:

ANZ maintains a bearish outlook on USD/JPY over the medium term, projecting a drop to 138 by year-end 2025, supported by an expected BoJ rate hike in October. However, short-term volatility is likely, driven by policy uncertainty, trade disruptions, and periodic USD strength.

Key Points:

• BoJ Cautious but Hawkish-Tilted:
  ANZ expects just one 25bp hike in October, as the BoJ remains cautious amid global policy risks. Governor Ueda signals potential for more hikes if inflation and growth support it.

• Japan’s Economy Faces External Headwinds:
  Q1 GDP contracted due to falling exports, especially to the US (-1.8% y/y), alongside weaker demand from China and the EU. Tariffs are acting as a structural drag.

• Inflation and Wages in Focus:
  Tokyo CPI rose 3.6% y/y in May—a two-year high—suggesting inflation risks persist. However, real wage growth remains negative, limiting consumption upside.

• JPY Gains Face Tactical Hurdles:
  ANZ cautions that JPY strength will be challenged by episodes of BoJ dovishness, strong US data, or tariff policy optimism, which could trigger USD/JPY rebounds.

• Forecast Path:
  USD/JPY is unlikely to sustainably break below 140 before Q3 2025 but should decline to 138 by year-end, assuming October's BoJ hike and gradual USD softening.

Conclusion:

ANZ sees the trend in USD/JPY as lower, driven by domestic inflation dynamics and modest BoJ tightening. But the path will be choppy, with tactical rallies driven by geopolitics and data surprises. Medium-term bears should brace for near-term volatility.