Synopsis:

Danske Bank forecasts that USD/JPY is approaching its peak, projecting a decline to around 130 in the next 6 to 12 months. This outlook is influenced by current yield dynamics and anticipated monetary policy shifts in Japan.

Key Insights:

• Current USD/JPY Trends: Despite stable US yields and rising oil prices, USD/JPY has been climbing, nearly reaching 151. This rise could be partly due to reduced pressure on Japanese yields and diminished concerns over Japanese FX intervention.

• Influence of Japanese Yields: The 10-year Japanese Government Bond (JGB) yield has decreased slightly, contributing to the upward movement of USD/JPY.

• Lack of FX Intervention: Reports indicate that Japanese authorities have not intervened in the FX market this year, reducing market concerns about potential actions to support the JPY.

• Dependency on US Yields and BOJ Policy: The JPY is unlikely to find support unless there is a notable drop in US yields or the Bank of Japan (BOJ) begins to normalize its monetary policy.

• Expectation of BOJ Normalization: Danske anticipates BOJ policy normalization and an exit from negative interest rates by Q2 next year. This expectation hinges on US economic conditions and Japanese wage growth data.

• Forecasts for Yield Differentials: Yield differentials between the US and Japan are expected to favor the JPY in the coming year, prompting Danske to forecast USD/JPY to approach 130 within 6 to 12 months.

Conclusion:

Danske Bank's analysis suggests that USD/JPY is nearing its peak with a potential decline towards 130 in the medium term. The movement of this currency pair will be closely tied to developments in US yields, Japanese monetary policy, and real wage growth in Japan. Market participants should monitor these factors for insights into the future trajectory of USD/JPY.