USD/JPY likely to close 2017 at 117, says Scotiabank

The Japanese yen (JPY) continues to reflect shifts in global investor sentiment and relative monetary policies. Perceptions of Japan’s sovereign creditworthiness have improved.

During the end of April, Fitch Ratings revised the outlook on Japan’s “A” sovereign credit rating to “stable” from “negative” on the back of the country’s improving economic outlook, which is reducing public debt-related risks. Standard & Poor’s and Moody’s rate the nation’s credit one notch higher at “A+” and “A1”, respectively, with a “stable” outlook.

While Japan’s public debt profile is weak, gross public debt will average 240 percent of the country’s gross domestic product (GDP) in 2017–18, according to the International Monetary Fund (IMF); the government has no difficulty refinancing its debt obligations at very low rates, due to solid domestic appetite for government bonds given Japan’s high savings rate.

The government does not rely on external financing for its debt as 90 percent of it is held domestically, primarily by the Bank of Japan (BoJ) and other public institutions, banks, and pension funds. Other countries’ central banks form the majority of foreign holders. Any debt-related turmoil seems a rather distant possibility in Japan.

"We assess that wider US–Japan yield spreads will keep JPY weakness in place through 2018, yet rapid changes in investor risk appetite may trigger periods of volatility given the JPY’s safe-haven status. We expect USDJPY to close 2017 at 117," Scotiabank reported.