The set-up in Japan continues to favour a weaker yen. Inflation is coming, but the BoJ will
want to be sure the train has arrived at the station before stepping off at the monetarytightening
platform. The top-left chart shows the lagged effects of a weaker yen should
keep CPI supported, but we should not expect to see this emphatically before the end of this
year. Similarly, higher wages are on the cards (top-right chart), but this does not mean that
higher CPI will follow immediately.

In the shorter-term, we are wary of the large short positions that have built up in the yen,
leaving it vulnerable to short-covering (bottom-left chart), although it is likely much of this is
against higher-yielding crosses, eg CAD, AUD and NZD. Short covering is always a risk, but
the BoJ has made it clear it will not tolerate higher yields and will buy potentially unlimited
JGBs to keep a lid on the 10y rate. This is a powerful force that mitigates to some extent
the risk of short covering, and we would look for opportune dips in USDJPY to buy it.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception