Yen appreciation likely to pose risks; USD/JPY to be at 104 by June-2020: Commerzbank

An appreciation in the Japanese yen is expected to pose risks, with the USD/JPY currency pair seen to reach 104 level by June 2020, according to the latest research report from Commerzbank.

Concerns about a global recession remain a dominant factor for the yen. But since the US Federal Reserve switched to a much more dovish attitude at the beginning of the year – also due to these concerns – the Yen has hardly been able to benefit from this as a safe haven currency.

In the medium term, however, the yen will continue to appreciate. Since the end of July 2018, the Bank of Japan (BoJ) has permitted a 10 basis point stronger increase in the yield on ten-year government bonds, which it had previously capped at 0.1 percent.

The reason is the BoJ's increasing fear of undesirable side effects of its low-interest rate policy on the banking sector. In view of the continuing pressure on margins in the banking sector, the market is likely sooner or later to expect a further steepening of the yield curve, the report added.

In view of the inflation rate, which is still well below the 2 percent inflation target, the BoJ continues to adhere to its forward guidance, according to which it will keep interest rates at low levels for a longer period of time. At the same time, the global environment is preventing the market from expecting an adjustment of BoJ monetary policy soon.

"In the short term, therefore, the weaker USD that we expect will be the main reason for lower USD-JPY levels. However, the longer the BoJ maintains its ultra-expansive monetary policy, the greater will be the pressure to support the financial sector," Commerzbank further added in its comments.

Meanwhile, in the long run, the prospect of higher interest rates combined with persistently low inflation suggests a stronger yen.