USD/JPY rose to a high on Tuesday at 148.70 after hitting a low of 146.99 in the initial aftermath of the BoJ policy update. Economists at MUFG Bank analyze the pair’s outlook.

The Yen which has fallen back closer to last year’s lows

The 10-year JGB yield hit a year-to-date high overnight at 0.75% and now stands almost 20 bps higher than the low from earlier in the month. If Japanese yields continue to adjust higher ahead of the BoJ’s next policy meeting in March, the developments should offer more support to the Yen which has fallen back closer to last year’s lows. However, the move higher in Japanese yields is currently being offset by the recent hawkish repricing of the US yield curve which is dampening the bullish impact on the yen from the BoJ’s policy update.

For USD/JPY to come back under renewed downward pressure in near term, market participants would have to become more confident again that the Fed could begin to cut rates in March which is currently priced at around a 50:50 probability