USD/JPY forecast for 2023: Bank of Japan maintains dovish stance, tweaks yield cap
How will monetary policies of Fed and BoJ affect the USD/JPY rate in 2023 and beyond?
The US dollar exchange rate against the Japanese yen (USD/JPY) weakened in the final quarter of 2022, with the yen strengthening at close to 132 per dollar.
JPY has hovered near its strongest levels in two months after lower-than-expected US Consumer Price Index (CPI) numbers bolstered hopes that peak inflation had been reached, and that the Federal Reserve (Fed) would tighten less aggressively in its upcoming meetings.
The yen was also supported after Bank of Japan (BoJ) Governor Haruhiko Kuroda recently hinted at a possible adjustment in the country’s yield-curve control policy “if the achievement of our 2% inflation target comes into sight”.
As noted by Capital.com analyst Piero Cingari on 19 December: “The yen’s two-month 10% surge – USD/JPY fell from 151.9 to 136 – has been fuelled by a number of factors, including the Japanese FX intervention, speculation about the Fed cutting interest rates next year, China’s reopening, and the rumours behind a BoJ hawkish tilt.”
Despite recent gains, USD/JPY has risen by 15.64% year-to-date, currently trading at levels last seen in the late 1990s.
One of the main factors driving the divergence between the dollar and the yen may be down to the fact the Fed is raising rates aggressively, while the Bank of Japan is keeping its benchmark rate at an ultra-low level. This makes the US dollar the more attractive investment option, which has largely been the case this year.
USD/JPY Live Exchange Rate Chart
Based on his USD/JPY analysis, Fawad Razaqzada, a market analyst at StoneX, told Capital.com:
Economies, including the US, have been tightening their monetary policies this year by raising interest rates and slowing asset purchases to counter the effect of rising inflation.
Since March, the US Federal Reserve has aggressively raised its main interest rate to a range of 4.25% and 4.5% as it tries to tackle the rising cost of living.
Japan remains the exception among developed economies, refusing to budge on its negative key interest rate of -0.1%. The BoJ said in May that it would continue to conduct aggressive monetary easing through yield-curve control to reduce the uncertainties in financial markets.
In its final meeting in mid-December, the BoJ unexpectedly loosened its 10-year government bond yield target and committed to a review of its controversial yield-curve control policy.
The move triggered a leap in the yen, which had spent most of the year sliding because of Japan’s low yields, coupled with a bearish Japanese stock market and the global bonds sell-off.
The cap on 10-year Japanese government bond yields (JGB) allows the yields to move up to 50 basis points (bps) on either side of the 0% target, up from the original 25 bps. At a low of 0%, the 10-year JGB keeps borrowing costs low for both state and private businesses.
The move, however, arrived earlier than expected, as most market watchers were looking for a yield target adjustment closer to the end of 2023.
Are you interested to learn more about the USD/JPY outlook in the near to mid-term? Read on for the latest USD/JPY news and analysts’ forecasts.
Bank of Japan maintains dovish policy
Speaking to reporters after the yield target rate decision on 20 December, Kuroda was at pains to note that this wasn’t an effective rate hike. “This isn’t the first step towards an exit,” he said, stressing over and over again that the move was a technical one to smooth the yield curve and not intended to signal a more hawkish turn. “Reviewing yield-curve control or the quantitative and qualitative easing programme is unthinkable for the foreseeable future.”
Bloomberg’s Gearoid Reidy and Daniel Moss commented on the decision:
“But the perspective also has some significant caveats. Kuroda has made policy somewhat less loose, but it’s a long way from tight. The era of easy money continues: The benchmark rate is still negative and the BOJ still says it’s prepared to ease further if necessary. Moreover, Kuroda’s decision comes late in the game. The BOJ may have moved a bit toward the other major economies, but they are getting ready to edge toward his position; the rate cycle around the world is close to peaking and borrowing costs may well retreat in 2023.”
Fed raises interest rate to counter rising inflation
The consumer price index (CPI) in the US – the main measure of inflation – has been rising every month since January 2021. The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles.
As inflation in the US rose to a 40-year high, the Fed quickly ended its bond-buying programme and started a rate-hiking cycle. In March’s Federal Open Market Committee (FOMC) meeting the Fed raised interest rates by 25bps, followed by a 50-point hike in May.
The Fed then raised interest rates by a further 75bps in four consecutive meetings on 16 June, 27 July, 21 September and 2 November, lifting the benchmark overnight borrowing rate to a range of 3.75%–4%.
On 14 December, however, the Fed slowed down its pace of rate hikes, boosting the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25% and 4.5% – a move that was widely expected by markets. The Fed also indicated that it expects to keep rates higher through next year, with no reductions until 2024.
CPI most recently came in at 7.1% year-on-year in November – the “smallest 12-month increase since the period ending December 2021”, according to the US Bureau of Labor Statistics.
The figure indicates a slowdown of inflation in the US, but the rate of price increases still remains way off the Fed’s target, meaning the end of the monetary contraction cycle could still be some time away.
USD/JPY technical analysis
The market saw the BoJ’s policy tweak as an early, surprise pivot – the yen punched 3.5% higher against the dollar on 20 December, with USD/JPY breaking below the 200-day moving average.
In a piece published on 21 December, FXStreet analyst Haresh Menghani commented:
“From a technical perspective, the overnight sustained weakness below the very important 200-day SMA and a subsequent break through the 50% Fibonacci retracement level of the strong 2022 rally was seen as a fresh trigger for bearish traders. That said, extremely oversold oscillators on intraday charts helped limit the downside, only for the time being.
“Any further recovery, however, is likely to confront resistance near the 132.70 area (50% Fibonacci level). Some follow-through buying beyond the 133.00 mark might prompt some short-covering move towards the 134.00 round figure. The next relevant hurdle is pegged near the 134.40 horizontal zone, above which the USD/JPY pair could aim to reclaim the 135.00 psychological mark.”
In a recent overview of the currency pair, Capital.com analyst Piero Cingari said:
“Overall, the BoJ is not deviating from its ultra-loose monetary policy, and has actually announced to increase the purchase of bonds between January and March, amid mounting growth risks for the Japanese economy.
“I continue to believe that this is an overreaction, compounded by the lack of liquidity at this time.”
In a comment to Capital.com’s Adrian Holliday, FX strategist and finance consultant at Keirstone, Francis Fabrizi, said the following of USD/JPY on 21 December:
“If the price is able to break below the 132.000 support level, I believe 130.000 will be the next target. I anticipate the price will attempt to retest 134.500 later this week.
“As the price has fallen below 134.500, it is possible this is indication of a price reversal.”
USD/JPY forecast for 2023
USD/JPY Exchange Rate (2017-2022)
Fiona Cincotta, senior market analyst at City Index, shared her view on the factors affecting the dollar/yen forecast with Capital.com:
As of 21 December 2022, according to data provider TradingEconomics, the yen was expected to trade at 139.185 against the US dollar by the end of this quarter. The website forecast USD/JPY to trade at 146.882 in 12 months’ time.
ING predicts the Japanese yen will weaken against the US dollar in the short term, ending the year at the 138 mark. The bank’s USD/JPY forecast for 2023 had the pair maintaining at around the 130 level by the end of the year, indicating returning strength for JPY.
Citibank believes the Japanese yen will fall against the USD. Analysts at Citibank suggest the USD/JPY pair will rise to 145 by the end of 2023. In their FX Snapshot from 19 December, the bank’s analysts wrote:
“DXY’s lack of follow-through from the 114.57 high made in late September probably suggests a peak in DXY is in and JPY may stabilise at levels well above its lows for this year (around the 144-145 area vs 151.95 in October).”
The USD/JPY forecast for 2025 and USD/JPY forecast for 2030 are more difficult to obtain as macroeconomic factors weigh heavily on the market.
When looking at USD/JPY predictions, keep in mind that analysts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing, and never invest or trade money you cannot afford to lose.