Speculation over additional stimulus from the Bank of Japan (BOJ) can jolt the dollar-yen but is no longer the main driver, analysts say, as focus shifts towards the U.S. economy and monetary policy.
“Diverging outlooks for real economic growth and monetary policy will drive the dollar-yen,” said Morgan Stanley’s Chief Asia and Emerging Market equity strategist Jonathan Garner.
The yield spread between Japanese Government Bonds (JGB) and U.S. Treasurys narrowed slightly last year as JGBs recovered from recent record lows. But expectations for solid U.S. economic growth and a Federal Reserve rate hike this year will likely see that spread widen as the BOJ maintains near-zero interest rates. Morgan Stanley expects 2015 economic growth of 3.3 percent and 1 percent for the U.S. and Japan, respectively.
This will likely spur yen selling as Japanese investors increase their holdings of higher yielding U.S. Treasurys. Currently, the 10-year Treasury yields 1.98 percent vs 0.402 percent for 10-year JGBs.