USD/JPY has spent the last 18 months tracking US-Japanese yield differentials with impressive consistency. Economists at Société Générale analyze the pair’s outlook.
The Yen has not been this cheap since the 1970s
Our rates strategists expect the US 5y yield to fall to 2.66% by this time next year, which would suggest USD/JPY would break below 130 if JGB yields stay at current levels and reach 125 if there were one further small adjustment to the band.
The correlation may be breaking, but the current level of USD/JPY bears little relation to the performance of the economy, and in real functional terms, the yen is cheaper today than the USD at any time since the 1970s. . A larger mispricing may last longer than we previously thought, but it is remarkable, and once rates begin to re-converge, the yen will surely rally.
