UBS sees a potential change in the currency pair’s trajectory.
UBS analysts suggest that the Japanese yen, which is experiencing significant weakness, may begin to reverse.
This forecast is based on growing concern among Japanese politicians and businesses about the negative impact of the depreciation of the yen on the country’s economy.
The report cites recent research on local small and medium-sized enterprises (SMEs), which are the main employment sector in Japan, employing about 70% of the workforce. The survey results showed that 35% of respondents experienced a negative impact on sales due to the yen’s weakness, and 63.9% reported a negative impact on profits.
Moreover, half of the firms surveyed said the “appropriate level” for USDJPY would be between 110 and 120, as opposed to the higher levels the currency pair has seen recently.
UBS calls the upcoming Bank of Japan (BoJ) meeting on June 14 a critical event that could affect the yen. The firm interprets the Bank of Japan’s tolerance for rising 10-year Japanese government bond (JGB) yields, which have hit an eleven-year high of 1%, as a sign of a possible hawkish turn in policy.
UBS expects Bank of Japan Governor Ueda may signal readiness to begin a rate hike cycle, with expectations of a policy rate hike from 0-0.1% to 0.25% in July, possibly followed by two additional 25 basis point hikes in 2025.
Given the likelihood of a more aggressive stance from the Bank of Japan and signs of a slowdown in US employment growth and inflation data, UBS maintains the downward trajectory of the USD/JPY pair.
They believe that a peak in the currency pair around 160 is likely, with a medium-term decline expected.
The report outlines potential boundaries for the USD/JPY pair, suggesting that a rise to 157.5-160 could trigger foreign exchange intervention, while a fall to 150-152 could attract demand for yield carry trades.
However, UBS also notes that if US economic data shows no signs of slowing, USD/JPY could remain at elevated levels.
This article was created with the help of AI and reviewed by an editor. For more information please see our Terms and Conditions.