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USD/JPY forecast: What’s next for the major pair?

The Japanese yen (JPY) is the most-traded Asian currency and the world’s third most-traded. The yen has been historically considered a safe-haven currency owing to its resilience in uncertain times.

This strength is rooted in Japan’s solid trade surplus. Its heavily traded nature raises the yen’s liquidity. When investors have fewer assets to hedge against market volatility, the Japanese yen may appeal more than riskier stocks and government bonds.

On 6 December 2021, the USD/JPY exchange rate fell to 113.150, amid fears of the new Covid-19 variant, Omicron.

In this article, we take a look at the yen’s performance this year and what factors have been driving the USD/JPY trend. We also review the latest USD/JPY forex forecasts for 2022.

Factors that have been driving the Japanese yen in 2021

The Japanese yen has grown weaker compared to the US dollar in 2021. Reasons for this include Japan’s continuing fight with Covid-19, the changing price-setting behaviour of companies during the pandemic, rising commodity prices and higher US Treasury yields. The price-setting came as shopping in Japan took a hit as demand fell, Adachi Seiji, a member of the policy board at the Bank of Japan, told local leaders at a meeting in Oita on 1 December 2021.

The increase in new Covid-19 cases affected industries that offer face-to-face services, such as hospitality. Japan’s vaccination programme has improved matters, but business has not returned to pre-pandemic levels.

Consumer spending in Japan fell. It accounts for nearly half the country’s gross domestic product (GDP). Average monthly consumption expenditure for a household in September was 265,306 yen ($2,340), down 1.7% in nominal terms and 1.9% in real terms from the same period last year, according to a news release by the Statistics Bureau of Japan.

The yen was also affected by rising fuel prices. Japan imports all of its fossil fuel. Crude oil, natural gas and coal generate nearly 70% of the country’s electricity, the US Electricity Information Administration said in a November 2020 report. Higher fuel prices drive up electricity prices. Higher energy prices take a toll on the country’s trade balance and economic growth.

Taking into consideration the latest available data, Japan’s economy contracted 0.8% in the third quarter of the year from the April to June quarter, according to the Cabinet Office’s preliminary estimates of 15 November 2021. On an annualised basis, the country’s economy declined 3% on weaker domestic demand. In addition, Japan had a customs-cleared trade deficit of 68.51bn yen ($604.4m) in October, from a trade surplus of 840.8bn yen a year earlier, the Ministry of Finance said on 17 November 2021.

And rising US Treasury yields have had a weakening effect on the USD/JPY currency pair – higher bond yields widened the yield advantage in favour of the US dollar.

Factors that have been driving the US dollar in 2021

The US dollar is the world’s highest traded currency. It’s a reserve currency for global trade and finance. The Federal Reserve’s (Fed) interest rate, the demand for US Treasury notes and the overall strength of the economy are some of the factors that affect the greenback.

The Federal Reserve lowered the target range for its benchmark interest rate to the record-low of 0% to 0.25% on 15 March 2020, where it has remained. In addition, the US central bank implemented a new round of quantitative easing (QE), raising its holdings of Treasury securities by at least $500bn and agency mortgage-backed securities by at least $200bn.  

The Fed’s dovish stance since the onset of the pandemic lowered the dollar’s value. Investors turned away from the US central bank’s record-low interest rates. However, the Fed’s announcement of tapering plans in November has boosted the dollar’s strength, as investors expect interest rates to rise.

Higher US Treasury yields as global markets started to recover from the pandemic strengthened the US dollar. Increasing yields indicated lower demand for Treasury bonds, which suggested that investors were taking on riskier investments such as stocks. The yield on the benchmark 10-year Treasury note rose to 1.44% on 2 December 2021.

The second real GDP estimate by the US Bureau of Economic Analysis on 24 November 2021 indicated that the figure increased at an annual rate of 2.1% in the third quarter of 2021, after a 6.7% increase in Q2. The increase was revised up 0.1 percentage points from the advance estimate released in the previous month. The US economy’s improved health translated to a stronger currency.

Let’s take a look at the USD/JPY analysis from major global financial institutions.

USD/JPY forecast for 2022: What are the experts saying?

Looking ahead, the Bank of Japan will likely continue to maintain its accommodative monetary policy until the 2% price stability target is attained, as Seiji said earlier this month.

Singapore’s DBS Bank expects the Japanese central bank to “keep the short-term and long-term policy rates unchanged through 2022, at -0.1% and 0%, respectively. But the pandemic-related special loan program may be gradually phased out after the March 2022 deadline.”

This could lead the country’s policymakers to “tolerate a weak yen amidst moderate domestic inflation and nascent economic growth,” DBS noted.

In a report released 30 November 2021, the United Overseas Bank, a Singapore-based banking organisation, said that the USD/JPY was likely to advance further within the next one to three months and meet the next resistance level at 114.20. The USD/JPY prediction 2022 is that the yen could weaken early next year.

Over a period of up to three weeks, considering the USD/JPY outlook, the United Overseas Bank said that the USD/JPY could weaken further, but a drop below 112.70 was unlikely.

Netherlands-based financial services group ING said on 17 November 2021 that higher US rates should support the USD/JPY currency pair near 115, “with scope for a break towards 120 as the Fed embarks on its tightening cycle – potentially next summer.”

In addition, the banking and financial services provider noted that “the combination of a turn in energy lower next spring and the Fed preparing for lift-off suggests 2Q22 could be the topside break-out period for USD/JPY”.

Note that this article does not constitute financial or investment advice. Keep in mind that analysts and online forecasting sites can and do get their predictions wrong.

We recommend that you always do your own research and consider the latest market trends and news, fundamental and technical analysis, and expert opinion before making any investment decisions. Also, keep in mind that past performance is no indicator of future returns. And never invest money you cannot afford to lose.


Read more: USD/CHF forecast: USD/CHF to parity in 2022?

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