HSBC strategists highlight that the Japanese Yen (JPY) has been the weakest G10 currency month-to-date, with USD/JPY trading in an unusually narrow range despite Japan’s large net energy import status and Gulf exposure. They argue a cautious Bank of Japan (BoJ) and domestic fiscal issues may delay USD/JPY’s move lower, although intervention risks and portfolio inflows should cap upside. HSBC’s base case still sees USD/JPY declining by year-end.

BoJ caution and fiscal strains vs caps

“Bearish sentiment towards JPY is consistent with Japan’s macro exposure. Japan is the largest net energy importer among advanced economies (scaled by GDP) and has deep economic ties with the Gulf region.”

“Despite these headwinds, USD-JPY has traded in an unusually narrow range recently. A cautious Bank of Japan (BoJ) and domestic fiscal challenges may delay USD/JPY’s convergence lower towards levels implied by rate differentials.”

“Key fiscal watchpoints include the possibility that funding for fuel subsidies may run out in mid/late May and that a supplementary budget may be proposed.”

“Offsetting factors include net portfolio inflows (foreign buying of Japanese equities and bonds month-to-date in April, alongside Japanese selling of foreign bonds) and firm verbal intervention from the Ministry of Finance, may help cap USD/JPY.”

“Our base case remains for USD/JPY to decline by year-end. Near-term upside risks include a more dovish BoJ, a more hawkish Federal Reserve (Fed), escalation in the Middle East conflict and renewed oil-price highs, and further fiscal slippage in Japan.”

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