FX.co ★ From sadness to joy: what awaits the yen in 2023

Last week, the Japanese currency strengthened against the dollar by more than 3%. However, analysts are not expecting USD/JPY to demonstrate any sharp dynamics this week. The entire movement will start after the New Year.

A triumph of JPY

Unlike in the West, not everybody went on holiday in the East. China and Tokyo are trading today, while Australia, Hong Kong and Singapore are closed.

USD/JPY is trading lower during the low-liquidity Asian session. At the time of writing, the major was down 0.3% to 132.6.

The dollar-yen asset is under strong pressure from growing speculation about a possible pivot of the Bank of Japan.

Recall that last week, the BOJ shocked markets with its unexpected adjustment of its yield curve control policy.

The central bank's decision to widen the band of the 10-year Japanese government bond (JGB) yield was seen by traders as a hawkish move. This led to a sharp jump in the yen.

Last Tuesday, the Japanese currency appreciated nearly 4% against the dollar, ignoring the BOJ chair's dovish rhetoric.

BOJ Governor Haruhiko Kuroda brushed aside the chance of a near-term exit from ultra-loose monetary policy, as inflation is expected to fall in 2023.

However, the market has a reason not to take Kuroda's comments seriously, whose term ends next April.

Most investors believe that after Kuroda's departure, the central bank will be forced to go on a hawkish track, as inflationary pressures will intensify.

Traders' fears on the matter intensified significantly after last Friday's report on consumer prices in Japan.

The data showed that the country's annual core inflation hit a new 40-year high of 3.7% in November. This was a further indication that price increases in Japan are becoming more widespread.

Forecast on USD/JPY: for a week, a month and a year

This week, USD/JPY will trade sideways because we don't expect any significant events in the next couple of days due to the holidays, which could affect the dynamics of the quote.

At the same time, analysts predict a flat trend with a downward bias given rising market expectations for a possible pivot of the BOJ.

However, after the holidays the picture might start to change in favor of the dollar. Danske Bank analysts believe that the greenback has quite good chances for growth amid increasing risk of the global recession.

According to Danske; "Central banks are forced into maintaining a stronger hawkish tone for longer in order to maintain downward pressure on inflation. A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions."

Analysts also expect the greenback to grow amid continued tightening in the United States. The fact that the Federal Reserve will tighten further should outweigh the possible capitulation of the BOJ.

Danske Bank predicts the USD/JPY will strengthen to 137 over the next 1 month and to 139 over the next 3 months.

The yen will be able to resume its growth against the greenback not earlier than April, when the current head of BOJ will leave his position and the central bank is likely to start normalizing its monetary course, experts emphasize.

According to their estimates, in six months, the pair will fall to the 135 mark, and in 12 months, the yen will be traded against the dollar at 128.