2021 USD/JPY Outlook: HSBC Holds Bullish Outlook

The Japanese yen increased about 5% against the US dollar in 2020 because of the markets Risk On-Risk Off (RORO) fixation. In 2021, economists at HSBC believe forex will shift away from RORO behaviour to relative economic growth. With a benign domestic growth outlook and probable outflows, they expect a less resilient JPY in the year ahead.

“We believe RORO will be superseded in 2021 by a greater fixation on economic activity, in particular, the relative experience of different countries and their ability to secure a recovery amid the uncertainty of COVID-19,” said HSBC.

Considering the resurgent pandemic, the Bank of Japan will likely maintain its ultraloose policy stance, while new Prime Minister Yoshihide Suga has earlier ordered the Cabinet to come up with a supplementary budget that could exceed 3% of GDP.

HSBC added that with longer-dated US yields rising again, the discussions around Japanese investors hedging their buying of foreign assets, or even slowing them, look likely to fade. Such outflows are likely to persist and contribute to JPY weakness.

All this points to a less resilient performance from the JPY, which indicates USD/JPY will rise gradually in the year ahead.

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Chart: Trends of USD/JPY