EUR/JPY: target at 137 in 6M - Danske Bank

According to analysts from Danske Bank, a steady Bank of Japan is likely to support further yen weakness. They see EUR/JPY moving to the upside in the next months. 

Key Quotes: 

“While an escalation in the tensions between the US and North Korea could lend support to the JPY, our base case is no further escalation. Furthermore, we see a continued soft Bank of Japan (BoJ), which would keep a lid on the JPY. We target EUR/JPY at 130 in 1M, 133 in 3M, 137 in 6M and 142 in 12M.”

“Exports have shown signs of weakness in Q2 after a few impressive quarters. However, the Q2 Tankan report and the PMIs continue to paint a positive economic outlook and domestic demand has shown signs of improvement recently, with both retail sales and consumer confidence looking fairly good. We expect the economy to continue expanding in the coming year and expect a further increase in the already positive output gap.”

“The Bank of Japan (BoJ) has explicitly promised to continue easing until inflation expectations are above the 2% target on a sustainable basis. In our main scenario, we expect the BoJ to keep its policy unchanged: maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% throughout our 12M forecast horizon assuming that BoJ governor Haruhiko Koruda is reappointed when his term as governor ends in April 2018.”

“The main risk to the BoJ’s extremely accommodative policy stance is PM Shinzō Abe’s plummeting approval ratings. Recently, they have tumbled to around 35% in the wake of a series of scandals involving him and his close political allies and accusations that Abe used his influence to secure the approval of a new department at a university run by a close friend.”