The US Dollar to Yen (USD/JPY) exchange rate has climbed to around 161.75, extending its rally to fresh multi-year highs as investors continue to favour the US Dollar.
Citi remains constructive on USD/JPY in the near term, raising its three-month forecast to 161.50, but expects the pair to retreat to 153 over the following six to 12 months.
The bank believes strong gains in Japanese equities have encouraged Yen selling and helped push USD/JPY back towards its 2024 highs. Citi also expects Japanese authorities to continue intervening in the foreign exchange market to support the Yen.
According to the bank, “the JPY-buying intervention since the end of April has already topped JPY11trn”, and it believes intervention “could swell further to around JPY30trn.”
Looking further ahead, Citi expects the policy gap between the Federal Reserve and the Bank of Japan to narrow as the BoJ continues normalising monetary policy while the Fed ultimately falls short of current market expectations for further tightening.
The bank also argues that rising Japanese government bond yields are making domestic assets increasingly attractive for both local and overseas investors, supporting capital inflows into Japan.
In Citi’s view, “USD/JPY will correct lower toward 153 by the end of this year” as narrowing rate differentials and improving capital flows provide stronger support for the Japanese Yen.
