Yen to Stay Supported Says Nomura

Image © Adobe Images

Nomura has revised its outlook on the Japanese yen, highlighting the Bank of Japan's (BOJ) increasing vigilance against inflation as a key factor limiting further depreciation.

While a May rate hike remains a possibility, Nomura maintains its base-case scenario for the BOJ to raise rates in July, according to a new latest research note from one of Japan's biggest banks.

The yen has faced downward pressure in recent weeks, particularly against European currencies, as investors pared back long-JPY positions amid hopes for a ceasefire in the Ukraine-Russia conflict. However, growing expectations of a sustained inflationary environment in Japan have led to some retracement in the currency’s losses.

"The BOJ has become more aware of persistent domestic price pressures. Although we see a low probability of a rate hike on May 1, its vigilance against inflation will likely cap the upside for USD/JPY," Nomura analysts wrote.

Market Pricing and Rate Hike Expectations

Nomura notes that market participants have begun pricing in more sustained inflation, with Japan’s 10-year break-even inflation rate (BEI) deviating from its traditional correlation with the yen. This trend suggests that domestic demand rather than external factors are increasingly driving inflation expectations.

The January Corporate Goods Price Index (CGPI) rose by 4.2% year-on-year, its highest level since mid-2023. While this inflationary pressure is largely supply-driven, it is expected to feed into consumer prices over the coming months.

While some market participants speculate that the BOJ could bring forward its next rate hike to May, Nomura sees this as a "risk scenario" rather than the base case. "Given that the next hike would bring the BOJ’s policy rate to the highest level in nearly 30 years, the central bank is likely to proceed cautiously, maintaining a six-month interval between hikes," the note stated.

Market pricing currently assigns a roughly 20% probability to a May hike, which Nomura considers "reasonable." The firm expects the BOJ to move in July instead.

Yen Forecast: Limited Downside

Despite recent volatility, Nomura expects USD/JPY to trade in a range of 150 to 155 in the near term. The yen’s relative resilience to U.S. tariff risks, combined with market speculation on BOJ policy, will likely keep the pair contained within this range.

"The BOJ’s stance on inflation should limit the potential upside beyond 155. At the same time, if markets aggressively price in a May hike, BOJ officials may push back against such expectations," Nomura wrote.

Beyond the USD/JPY pair, Nomura sees downside risks in yen crosses, particularly GBP/JPY, given the yen’s relative strength against European currencies.