Mean Reversion on the USDJPY Rate
The JPY has been in a strengthening trend against the dollar for decades, this can be seen by the clear resistance line on the USDJPY rate going back to late 1986. This resistance line was broken last year as a result of the actions taken by the Fed.
The grey area represents the beginning of Japan's Heisei economy to the resistance break, scaled to the upper and lower bounds of the USDJPY rate. Using mean reversion as a baseline for this thought, we could expect the USDJPY rate to normalize at some point in the future back down to its historical averages. The midpoint of the grey area is about 118, however given the strength of the resistance line, I believe there could be a test back to that line. Visually it seems that these dramatic fluctuations in rate seem to last about 3 years, which is why I have a vertical line at March 2025. Assuming mean reversion occurs and the USDJPY tests the resistance line, that could happen at the end of 3 years around 111.
The JCB has not yet made any decision to raise their own rates domestically, so if all else is equal, the rate could still push higher if the Fed does in fact continue to raise the US Fed Funds rate and the JCB remains where they are. Either way, it seems like the JPY has potential to outperform the USD over the next few years.
The grey area represents the beginning of Japan's Heisei economy to the resistance break, scaled to the upper and lower bounds of the USDJPY rate. Using mean reversion as a baseline for this thought, we could expect the USDJPY rate to normalize at some point in the future back down to its historical averages. The midpoint of the grey area is about 118, however given the strength of the resistance line, I believe there could be a test back to that line. Visually it seems that these dramatic fluctuations in rate seem to last about 3 years, which is why I have a vertical line at March 2025. Assuming mean reversion occurs and the USDJPY tests the resistance line, that could happen at the end of 3 years around 111.
The JCB has not yet made any decision to raise their own rates domestically, so if all else is equal, the rate could still push higher if the Fed does in fact continue to raise the US Fed Funds rate and the JCB remains where they are. Either way, it seems like the JPY has potential to outperform the USD over the next few years.
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