USDJPY has been on a tear upwards this year. However, over the last month, we have seen a fair amount of downside. The question is whether this is a short-term pullback or the start of a larger move lower. We think that this largely depends on the future path of US 10 year yields, as we think JPY yields are anchored at zero by the BOJ. Hence, the next moves in USDJPY will like come from changes in the US yield curve:

Above, we show our yield curve forecast, in which we expect yield curve to turn lower after their significant steepening earlier this year. This will likely come from a significantly lower 10 year-yield in H2 2020. Hence, while USDJPY might have some room left to appreciate, it looks like US yields are headed lower. However, this outlook could change completely if we begin to see tapering expectations in the US. Nonetheless, USDJPY looks like an attractive short term trade, even though the fundamental support is weakening:

As a general note, we prefer trades that have both an accommodative fundamental outlook and strong risk-return profile. Wile the risk-return profile looks good on USDJPY, the fundamental support for this move is waning. There may be room for USDJPY to rally further until July, but with US yield likely peaking the trade is less attractive as a few months ago.