Amid elevated global financial market uncertainty and resultant safe-haven flows, the Japanese yen (JPY) began 2016 with a strengthening bias against the US dollar (USD).
Nevertheless, we believe that the JPY will resume its prior depreciating trend on the back of Japan’s fundamental economic weakness — inadequate structural reform, massive public sector indebtedness, aggressive monetary easing, and unattractive interest rate differentials relative to other major economies. Moreover, the gradual internationalization of the Chinese renminbi in global trade activity is a structural factor weighing on the JPY. However, occasional bouts of investor risk aversion may temporarily support the JPY and Japanese securities over the course of 2016. We expect USDJPY to close 2016 at 131, around 8% weaker since the end of 2015