Bank of America Global Research discusses USD/JPY outlook and maintains a bullish bias over the medium-term.
"With lower oil prices and stalling outward M&A by Japan Inc., corporate JPY supply has likely peaked for now. However, investors' USD demand, another pillar of USD/JPY strength this year, could continue as the Fed's rate hikes boost the USD/JPY carry and hedge cost. In the last tightening cycle, USD/JPY declined and JPY strengthened after the Fed stopped hiking rates at end-2018 with developed market (DM) central banks unable to hike as much Meanwhile, in the preceding cycle before the Global Financial Crisis, USD/JPY rose and JPY weakened while the Fed held policy rate at 5.25% for 14 months after the final hike and DM central banks hiked as aggressively," BofA notes.
"A combination of synchronized DM policy tightening and a long-hold after the final hike by the Fed would keep JPY undervalued. With the Fed's first cut priced for 2Q23, the risk is a strong US labor market, sticky inflation, and a hawkish Fed pushback against the market pricing making the USD/JPY strength last longer," BofA adds.