Credit Agricole cites several factors for the continued weakness of the Japanese Yen (JPY): a persistently dovish Bank of Japan (BoJ), a robust Nikkei, a modest economic recovery in China focusing on services and consumption rather than investment, easing concerns about US regional banking, nonchalant investor attitudes towards US debt ceiling negotiations, and a US economy demonstrating resilience to Federal Reserve rate hikes.

Furthermore, the peak in the Fed Funds rate and the potential of the US economy falling into recession may put downward pressure on USD/JPY. While a resolution to the US debt ceiling is expected, the market has largely factored this in, thus the downside for the JPY from this source of weakness appears to be nearly exhausted. High US rates also risk causing further difficulties for US regional banks, which may bring back a safe-haven bid for the JPY.

However, Credit Agricole acknowledges its surprise at the JPY’s weakness during Q2. As a result, it has revised higher its USD/JPY forecasts, adjusting the end-Q2 forecast from 128 to 134, and the end-2023 forecast from 122 to 128.