Japanese Yen price forecast 2 February 2021

2021-02-02

Yen loses its shine. Forecast as of 02.02.2021Dmitri Demidenko

Against the backdrop of a potential victory over the pandemic, the opening of the world’s leading economies, and the rapid growth of global GDP, the fate of the Japanese yen looks unpromising. [USDJPY][1] and [EURJPY][2] bears remain unready to resist. Let’s discuss the market outlook and make up a trading plan.

Fundamental Japanese Yen forecast for six months

If you want to do something well, do it yourself. For the first time since 1989, the [Nikkei 225][3] recorded a double-digit profit for the year (+16% in 2020) against the background of the outflow of foreign capital from the Japanese equity market. This helped to dispel the myth that the stock index cannot grow without the participation of non- residents. In 2008, it collapsed by 42%, in 2018 by 12% due to foreign investors’ flight from Japan. It’s time for local companies to get down to business. Their activity, pushing [Nikkei 225][3] upwards, is one of the factors that weaken the yen.

Dynamics of foreign capital flows in the Japanese stock market

Source: Bloomberg.

The rise in stock indexes in Japan contrasts with the difficult situation in which the population and the economy found themselves. The government is likely to extend the deadline for the lockdown liftings from February 7 to March 7, which the Dai-Ichi Life Research Institute estimates will cost GDP about ¥3 trillion. Bloomberg experts’ consensus forecast suggests that the indicator will decrease by 2.5% in the first quarter, but not all experts are so pessimistic. SMBC Nikko Securities believes the economy will shrink by 11.5%.

However, as the American experience shows, it is unnecessary to have robust macro statistics for a rapid rally of the stock index. The massive fiscal stimulus of official Tokyo and the ultra-easy monetary policy of the Bank of Japan allow investors to forget about the risk. With the [Nikkei 225][3] rise, foreigners hedge against the foreign exchange risks of local investment by selling the yen. As a result, its inverse correlation with the stock market is mushrooming.

Source: Trading Economics.

[In the previous article][4], I stated that the main driver of the [USDJPY][1] and [EURJPY][2] rallies in 2021 would be an increase in risk appetite amid expectations of a global economic recovery. I maintain this point of view, but currently, the market is increasingly focused on trade based on vaccination speed. In these terms, Japan loses both to the United States, where 25.2 million people (7.6% of the population) were inoculated, and the European Union (10.1 million or 2.3%). So far, Tokyo prefers to fight COVID-19 with lockdowns, which puts the yen in a losing position. Indeed, the number of infected people in Japan is decreasing, but this is not enough.

Dynamics of the number of COVID-19 cases in Tokyo

Source: Bloomberg.

In the short term, the [USDJPY][1] and [EURJPY][2] bulls should go ahead by the shortcomings in the fight against the COVID-19, the depth of the recession in the Japanese economy, and foreigners’ intention to hedge against the Forex risks of investing in Nikkei 225. In the medium and long term, the yen will finally be drowned by the global economic recovery.

[USDJPY][1] and [EURJPY][2] trading plan for six months

Since my [previous forecasts][5], the [USDJPY][1] and [EURJPY][2] pairs have grown by 1.2% each. It is equivalent to almost two figures, and I still see no reason to abandon the buying strategy based on the decline of prices. The US dollar and the euro’s target areas are still zones ¥107-108 and ¥ 129-130, respectively.

Price chart of USDJPY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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