Why Morgan Stanley sees a bounce
USDJPY should continue marching higher, supported by bullish risk appetite and yield differentials turning in favour of USD. A test of 112.50 seems likely with recent latest signs of Japan resuming buying in foreign debt markets.
However, we doubt USDJPY can establish a long-term uptrend from here as medium-term downside risks remain in place.
First, pension fund 1Q losses will likely lead to higher FX hedging ratios, leading to JPY demand.
Second, the BoJ's Kuroda effectively ruling out 'helicopter money', i.e., funding of a government spending package via the BoJ balance sheet; the remaining policy tools (private asset purchases via ETFs, cutting rates further into negative territory or enlarging the JGB purchase programme) only have a limited impact on JPY valuation.
Hence, we view the anticipated move to 112.50 as a correction within a longer-term bear market.
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