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Forex pairs in this Article » USD/JPY (Barcelona) - A frequent client question John Normand, FX strategist and his team at JPMorgan get asked, what should be the fair value on USDJPY if the Bank of Japan lives up to the expectations in delivering a 2% inflation?

"An increase in Japanese inflation from the current -0.5% to 2% would shift the real rate differential between the US and Japan from its current -2% to zero, and would justify a USDJPY rate of 109" John argues.

JPM sugests, however, "to take that projection with a dome of salt given that such a model entails a standard error of 10 yen, implying that the actual value could be in a range of 100 to 120."

Even if the BoJ fails to generate inflation, JPM model still predicts USDJPY around 98, with a ten-yen range.

Lastly, Mr. Normand adds: "We are well on record thinking that these inflation-based valuation models are too conceptually flawed to drive strategy or forecasts since they assume only prices matter for currencies. But no doubt this question of what the yen is worth under Abe's Bank of Japan can sustain yen selling interest until at least the spring."
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