Investing.com — Citi has updated its forecast for the USD/JPY, providing insights into the pairโs trajectory for both the medium-term and long-term.
The bankโs strategists highlight that the recent depreciation of the yen is driven largely by a retrospective narrative tied to Japan’s digital account deficit. However, they suggest that this narrative of structural yen weakness is a โfallacy,โ with the currency’s current status being more nuanced.
In its medium-term base case forecast, Citi suggests the yen could weaken, potentially driving the USD/JPY towards 150 by the end of 2024.
However, looking further ahead, strategists caution the pair could dip below 140 in early 2025, continuing its downward path to close near 130 by the end of next year.
In explaining this forecast, Citi points out that various factors could reverse the recent yen weakness.
Among these is the potential repatriation of foreign earnings by Japanese corporations, which could provide upward pressure on the yen. Moreover, the travel surplus and increasing royalties on intellectual property are improving Japanโs current account balance, which might further support the currency’s strength over time.
Citi also challenges the prevalent view that Japanโs digital account deficit reflects a long-term structural weakness.
โIn our view, this is essentially a trend-following argument that seeks a retrospective narrative of the JPY depreciation that has continued for the past ten years,โ Citi strategists noted.
โIt is based on a distorted story of the actual picture of Japanโs BoP, and the rectification of this distortion could take several years. During this period short JPY positions held by a range of economic entities will remain, and there should be steady market forces that work to overturn these positions.โ
Still, Citi remains cautious about the yenโs near-term outlook. The bank acknowledges that significant factors, such as portfolio investments and the broader financial balance, will continue to influence USD/JPY fluctuations.
They also warn that the pair remains sensitive to marginal changes in market conditions and flows.
This post is originally published on INVESTING.
