PiCK

Summary

  • Neil Parker said the dollar-yen exchange rate will fall to 147 yen next year, signaling yen strength.
  • He said the yen could strengthen if the Bank of Japan raises its policy rate to at least 2% and the US-Japan interest-rate gap narrows.
  • Parker said investors would only need to make a partial adjustment to their low exposure to the yen and Japanese assets, and stressed the need to watch the gap between macroeconomic indicators and exchange-rate forecasts.

Forecast Trend Report by Period

The strategist ranked No. 1 in Bloomberg’s exchange-rate forecast accuracy rankings expects the yen to strengthen sharply next year as Japan raises interest rates.

Bloomberg reported on November 9 that Neil Parker, head of economics and market strategy at TTT Moneycorp, sees the dollar-yen rate falling from about 155 at the end of this year to 147 next year. His view is that a narrowing interest-rate gap between the US and Japan will bolster the yen.

Parker expects the Bank of Japan to lift its policy rate from the current 1.25% to at least 2%, with a move to 2.25% possible depending on conditions. By contrast, he sees the Federal Reserve delivering one additional rate increase in December before holding its benchmark rate in a 4.00% to 4.25% range.

“Japan could be an exceptional case in that the Bank of Japan is actually following through on its promise to adjust rates in line with inflation,” Parker said. In his view, that means Japan’s tightening cycle could move faster than markets expect.

Japan’s inflation trend also supports the case for higher rates. In September, Japan’s consumer price index excluding fresh food and energy rose 2.4% from a year earlier. Parker said the BOJ could turn more aggressive if that measure rises above 2.6%.

He added that investor views on the yen could shift if the US-Japan rate gap narrows by another 0.5 percentage point by the middle to latter part of next year. Investors do not need to sharply increase their allocations to Japanese assets, he said. A partial adjustment from current low exposure would be enough.

Still, forecasts for the yen remain sharply divided in the foreign-exchange market. The strategist who topped Bloomberg’s forecast rankings in the previous quarter said the dollar-yen rate could rise as high as 170 next year. The split reflects different views on the pace of BOJ tightening and the path of US monetary policy.

The dollar-yen pair has traded at an average of about 158 this year and climbed as high as 163.99 in July. That was followed by joint foreign-exchange market intervention by US and Japanese authorities. Parker said investors should focus less on short-term swings and more on macroeconomic indicators such as interest rates and inflation in the two countries. The key to forecasting exchange rates, he said, is identifying the gap between market expectations and actual economic conditions.

Suehyeon Lee