USD/JPY set to hit 147 by September – BofA

Economists at the Bank of America expect to see a high USD/JPY pair due to carry-trade.

Potential Correction in 2024

We expect the USD/JPY pair to remain high due to carry-trade, forecasting it to reach 147 by September.

We align with the consensus view that the USD/JPY may undergo a correction in 2024 due to policy convergence. We anticipate the Federal Reserve to begin cutting rates in May 2024, while the Bank of Japan (BoJ) is expected to withdraw from negative interest rate policy around mid-2024.

Despite the expected policy convergence, we warn that there is a downside risk for the Yen in 2024. The market is currently pricing in approximately a 170 bps rate cut from the Fed's peak policy rate in fall 2023 to the end of 2024. There is considerable uncertainty about whether US inflation will slow down enough to enable the Fed to start reducing rates.

If the Fed does not cut rates in 2024, the Yen’s weakness could enter a third phase. The first phase is characterized by policy divergence in 2022, the second phase by carry trade in 2023, and the third phase by Japanese households rebalancing offshore assets to preserve their purchasing power in 2024.