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Forex pairs in this Article » USD/JPY
FXStreet (Barcelona) - Yujiro Goto, FX Strategist at Nomura notes that bond investors’ inflation expectations for one year and two years increased in January and sees low yields and political stability as positive for USD/JPY.

Key Quotes

“One-year inflation expectations reached 1.72%, the highest since July 2004 when the data series began, from 1.54% in December. Two-year expectations also inched up to 1.66% from 1.62%. 10-year inflation expectations fell to 1.44% from 1.45% though. Recent positive inflation surprises are likely to have influenced expectations in the bond market, especially short-term inflation expectations.”

“Real JGB yields, based on inflation expectations from the bond investor survey, all remain negative from one to 10 years. As US yields fell in January, in nominal and real terms, the real yield difference between the US and Japan shrank a bit. Weak NFP and risk-offs, due to higher volatility in the EM market, depressed US yields in January. However, we expect the yield difference between the US and Japan to widen again, as the Fed keeps normalizing its quantitative easing policy.”

“Separately, over the weekend, many local media reported that ex-Health Minister Yoichi Masuzoe is still the frontrunner of the Tokyo Governor election on 9 February. Most media report that Mr Morihiro Hosokawa, who is backed by ex-PM Junichiro Koizumi and is arguing for nuclear generation to be ended immediately, remains in second to third place (Nikkei). Thus, the Tokyo Governor election is likely to be a positive result for the Abe cabinet, which is regarded as positive for the Nikkei and USD/JPY.”

“While USD/JPY has traded weakly recently, low real yields and the stable political situation in Japan remain positive for USD/JPY in the medium term.”
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