According to economists at Standard Chartered, there are two significant tail risks that could bolster the argument for a notably stronger Japanese Yen (JPY) in the near future.
USD may see some immediate upside against the JPY if the BoJ maintains its policy settings in March
Firstly, there persists a notable risk of a severe economic downturn in developed markets (DMs), which could revive demand for safe-haven assets like the JPY.
Secondly, there’s a possibility of the Bank of Japan (BoJ) surprising the markets with a more aggressive tightening stance than currently expected. It’s worth noting that the BoJ has various levers to adjust, including the benchmark rate, the three-tiered system of interest rates, and Yield Curve Control (YCC). Bloomberg has reported potential plans by the BoJ to end YCC while announcing the magnitude of bond purchases in advance, possibly to prevent a sudden surge in long-term yields.
However, if the BoJ maintains its current policy settings in March, the USD may experience some immediate strengthening against the JPY, potentially reversing its recent losses. This outcome would depend on the central bank’s communication and guidance regarding its monetary policy meeting scheduled for April.
