The yen has weakened overnight following the BoJ’s latest policy meeting resulting in the USD/JPY briefly moving back above the 115.00-level. But economists at MUFG Bank believe that the recent failure at 117.00 is a sign of the beginning of the end of the trend higher in USD/JPY.

USD/JPY overvaluation has become more stretched

“The BoJ left their monetary policy settings unchanged but now judges that risks to inflation are ‘balanced’ instead of ‘tilted to the downside’. The BoJ noted that as wage increases give households more purchasing power, a broader range of firms will raise prices. That, in turn, will push up inflation and heathen public perceptions that prices will rise further.” 

“The widening divergence between BoJ and Fed policy expectations should continue to place upward pressure on USD/JPY. However, USD/JPY’s recent clear failure to test the 117.00-level has provided a bearish technical signal for the pair in the near-term. That failure and the fact that the market was short JPY means the prospect of a quick rebound for USD/JPY is diminishing. 

“We have long argued the case for a correction and it seems that has unfolded a little sooner than expected. Assuming though that US dollar sentiment improves broadly, some USD/JPY recovery is feasible but this correction could be a sign of the beginning of the end of the trend higher in USD/JPY that began at the start of last year.”