Economists at OCBC Bank expect the USD/JPY pair to remain firm in the near term. But in the medium term, the JPY is set to recover as BoJ moves away from YCC regime at some stage while Fed pauses or pivots policy.

A story of yield differentials

Sizeable USD carry could keep the pair supported until the market expectations on Fed shifts less hawkish or BoJ shifts.

The recent sharp rise in USDJPY to 143 heightens the risk of policymakers engaging in leaning against wind activities. Such activities will only serve to slow the pace of USD/JPY upticks especially if the uptrend remains intact. A reversal in the trend would require market dynamics to change (i.e. USD to turn or yield differentials to narrow, etc.). 

Looking out, we expect USD/JPY to trade lower on the back of a moderate-to-soft USD profile (as Fed tightening stretches into late cycle and that USD can fall when pause or pivot comes into play) and expectation for BoJ to shift towards policy normalisation amid higher inflationary pressures in Japan.