USD/JPY had been trading in a narrow range around JPY102, but JPY selling has recently picked up. The Japan-US monetary base ratio (Japan's monetary base size divided by the US), tightly correlated to USD/JPY since the collapse of Lehman Brothers, has been rising as the BoJ maintains large-scale monetary easing while the FRB scales down asset purchases (Figure 16). Further, the US-Japan 2Yr yield spread (US minus Japan) has been gradually widening as US yields rise. Although encouraging JPY weakening and USD strengthening behind the deadlock of exchange rate, such trend may have been gradually reflected in the exchange rate.
We expect the JPY to weaken and the USD to strengthen going forward gradually. As explained above, Japan's long-term yield will remain low because of the BoJ's continued large-scale monetary easing, while the US long-term yield will come under upward pressure as speculation of a US rate hike builds. The Japan-US real long-term yield spread is expected to widen even more as Japan's inflation rate stays firm (Figure 17). Although the risk of JPY-buying as a last resort safe haven bears watching as global geopolitical risks intensify, we think that conditions will continue to support JPY selling.