USD/JPY: To Top Out Around 106 Before Dropping Towards 100 in 3 Months

[thenews]

In Japan, we note that the outcome of the Upper House election was a supermajority for PM Abe's LDP, in concert with allies. While much focus will be on what Abe does now with respect to pushing through revisions to Japan's pacifist constitution, Abe has promised to "accelerate Abenomics to meet the public's expectation". We have long argued that a clean Abe win will give the BOJ more confidence to push on with controversial new monetary policy measures, be they pushing further with negative rates (introduced in January) or coming up with new forms of policy that could be interpreted as variations on the theme of "helicopter money".

As such, we suspect that between now and the outcome of the next BOJ meeting on 29 Jul, the market will build enough of a head of steam to take USDJPY back towards its pre-Brexit Vote trading levels around 106.00, much as many global equity markets have recovered or pushed beyond their own pre-Brexit levels.

But with that already amounting to a significant rally from post-Brexit lows, we suspect the market will struggle to push much beyond that level before 29 Jul unless very clear signs are given that a major easing move is on the cards.

Credit Suisse Japan economists are still calling for no change at this month's BOJ meeting, arguing instead that all we will see are further modest rate cuts and bond buying operations in November. If they are right, our existing 100 USDJPY 3m target will still look reasonable. Our economists do however hold out the possibility that the BOJ and government will aggressively continue on with the existing playbook, and introduce direct and unlimited BOJ buying of government bonds hand in hand with a much more aggressive inflation target.

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