Bank of Japan to continue to lag well behind the Fed

The recent slide in the yen against the dollar has mainly been driven by speculation that the Bank of Japan will soon start to loosen monetary policy much more aggressively. However, there is little chance that the Japanese central bank will step up its asset purchases sufficiently to close the gap with the US Fed. This is consistent with our forecast of a rebound in the yen in the second half of the year as the markets’ increasingly unrealistic expectations are disappointed.