USD/JPY range to shift higher

Bank of Japan (BoJ) Governor Haruhiko Kuroda's recent comments about the yen's real effective exchange rate and his later explanatory remarks prompted discussions in the FX market.

Basic scenario is that USD/JPY will hover in the USD/JPY120-125 range for the time being as Kuroda may prefer near-term FX stability and as long-term policy divergence may take time to manifest itself in light of the crowded yen short position, potential risk of market correction on the normalization of US monetary policy, and the current USD/JPY seems to be partly priced for future divergence.

The acceleration of the US economy and rise in short-term yields, the possible downward revision of the BoJ's bullish price outlook down the road, and (3) the BoJ's asymmetrical stance on policy responses, we continue to see a gradually higher USD/JPY trajectory. 

"The range is likely to transition into USD/JPY125-130 into 1H16 as USD/JPY to rise to 125 by year-end and beyond in H1 16", forecasts Bank of America.