The US Dollar to Yen (USD/JPY) exchange rate has rallied on Thursday, amid hopes surrounding the US debt ceiling talks, strong US job data, and upbeat US data releases.
Derek Halpenny, Head of Research, Global Markets, EMEA & International Securities at MUFG, suggests that the recent trend seeing a weaker Japanese Yen (JPY) may not last, due to the changing dynamics that drove the currency weaker in 2022.
"We remain unconvinced that the trend in yen weakness can persist. The dynamics that drove the yen weaker in 2022 are changing and that will mean upside scope will be far less going forward," says Derek Halpenny.
He further emphasises the significance of Japan's shifting trade data influenced by falling energy prices.
"The turn in the energy markets that has seen the huge negative energy terms of trade shock start to reverse...we saw Japan’s trade deficit continue to shrink helped by falling energy prices," he adds.
Japan's Trade Data
Halpenny also details the notable decline in Japan's total imports, which fell 2.3% in April, the first drop since January 2021.
"A shrinkage in the trade deficit was further helped by a 2.6% increase in exports. Japan’s energy import bill is now falling sharply – the annual change was -17.7% in April which contributed to 5.0ppts of decline in overall imports," says Halpenny.
He also addresses the influence of US rate expectations on the yen, implying a potential reversal in the USD/JPY trend when this momentum fades.
"Of course this underlying change for the yen will play second fiddle to rate expectations in the US which is the current driver of the move higher in USD/JPY but will add potential impetus the other way when the US rates momentum fades, which it inevitably will do going forward," Halpenny adds.
Derek Halpenny, Head of Research, Global Markets, EMEA & International Securities at MUFG, suggests that the recent trend seeing a weaker Japanese Yen (JPY) may not last, due to the changing dynamics that drove the currency weaker in 2022.
"We remain unconvinced that the trend in yen weakness can persist. The dynamics that drove the yen weaker in 2022 are changing and that will mean upside scope will be far less going forward," says Derek Halpenny.
He further emphasises the significance of Japan's shifting trade data influenced by falling energy prices.
"The turn in the energy markets that has seen the huge negative energy terms of trade shock start to reverse...we saw Japan’s trade deficit continue to shrink helped by falling energy prices," he adds.
Japan's Trade Data
Halpenny also details the notable decline in Japan's total imports, which fell 2.3% in April, the first drop since January 2021.
"A shrinkage in the trade deficit was further helped by a 2.6% increase in exports. Japan’s energy import bill is now falling sharply – the annual change was -17.7% in April which contributed to 5.0ppts of decline in overall imports," says Halpenny.
He also addresses the influence of US rate expectations on the yen, implying a potential reversal in the USD/JPY trend when this momentum fades.
"Of course this underlying change for the yen will play second fiddle to rate expectations in the US which is the current driver of the move higher in USD/JPY but will add potential impetus the other way when the US rates momentum fades, which it inevitably will do going forward," Halpenny adds.