HomeNewsUSD/JPY Forecast: Will the BOJ Buckle?
USD/JPY Forecast: Will the BOJ Buckle?

USD/JPY Forecast: Will the BOJ Buckle?

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USD/JPY could be in for a volatile week for trading with both the FOMC and Bank of Japan (BOJ) interest rate decisions on the horizon.

The Japanese yen slipped to its lowest weekly close this millennium on Friday. The USD/JPY pair surged to ¥144.96, equaling the highest price since 1998, before ending the week up 0.20% at ¥142.90.

The poor weekly performance sees the yen down 24% against the greenback in 2022, down almost 40% since the start of 2021.

The yen’s weakness against the dollar is the differing approaches being adopted by the opposing central banks. Moreover, US and Japanese monetary policy is expected to diverge even further this week when the FOMC and BOJ deliver their interest rate decisions.

On September 21, the Fed is widely expected to raise rates by 75 basis points to 3.25%. Furthermore, analysts now forecast US interest rates to reach 4.00% soon. The BOJ on the other hand is expected to keep interest rates super-low at -0.10%.

Will The BOJ Change Course?

However, the question is how long can the BOJ refrain from tightening? The bank’s current policy path has crushed the yen’s purchasing power this year. As such, investors continue to pull capital from Japan, in search of higher yields elsewhere. Notably, the rate of inflation starting to creep higher in Japan, which could force the BOJ to change course. Presently, inflation is running at 2.6% annually, expected to rise to 3.00% by the end of this quarter.

Considering the yen’s weakness and the higher inflation, will the BOJ surprise markets with a shock rate hike? For now, the market is pricing no change this week. However, if the yen keeps falling, it may soon reach the BOJ’s line in the sand — wherever that may be.

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US Dollar to Japanese Yen Outlook

The monthly chart highlights the severity of the yen’s decline. USD/JPY continues to trade with accelerating bullish momentum. Subsequently, the rate is approaching the 1998 high of ¥147.67. Which, if cleared could open the door to an extension to the May 1990 high at ¥160.40. However, the Relative Strength Index (RSI) of 83.03 is close to a record high. With this in mind, a violent reversal is likely at some stage.

Considering the recent price action, this week’s upcoming central bank meetings could cause extreme volatility. If the Fed delivers a 75, or even 100 basis point hike, and the BOJ sits tight, we expect USD/JPY to strengthen further. However, a more-dovish FOMC, or indeed a hawkish BOJ could fire the starting gun on a furious yen rally.

USD/JPY Price Chart

Elliot Laybourne
Elliott is a former investment banker with a 20 year career in the city of London. During this time he held senior roles at ABN Amro, Societe Generale, Marex Financial and Natixis bank, specialising in commodity derivatives and options market-making. During this time, Elliott’s client list included Goldman Sachs, JP Morgan, Credit Suisse, Schroders Asset Management, and the Pennsylvania State Public School Employees Retirement System, amongst others. Today, he splits his time between Thailand and Dubai, from where he provides trading consultancy and business development services for family office and brokerage clientele.