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The diverging paths for monetary policy fosters a long-term bullish outlook for USD/JPY, but the Federal Reserve’s and the Bank of Japan’s (BoJ) wait-and-see approach may continue to drag on the exchange rate especially as Janet Yellen and Co. look to further delay their normalization cycle.

With Fed officials now projecting two rate-hikes for 2016, the less-hawkish stance accompanied by the downward revision in the growth rate may keep the dollar under pressure even as the U.S. economy approaches ‘full-employment.’ The external risks surrounding the region may encourage the Federal Open Market Committee (FOMC) to stay on hold throughout the first-half of this year, and Chair Janet Yellen may make further attempts to buy more time amid the slowdown in the global growth. With that said, the cautious outlook laid out by the FOMC may continue to drag on interest-rate expectations and spur further losses for the greenback as the Fed forecasts remain susceptible to a further downward revision at the next quarterly meeting in June.

At the same time, the BoJ may stick to the sidelines for the foreseeable future and may even scale back its willingness to implement more conventional/non-conventional tools as the central bank continues to gauge the impact of negative interest rates. In turn, Governor Haruhiko Kuroda may strive to jawbone the local currency especially as the central bank struggles to achieve the 2% target for inflation, but the slowdown in the global economy accompanied by the decline in risk-appetite may continue to boost the appeal of the Japanese Yen as it largely preserves its role as a funding/safe-haven currency. With Japan moving back to its historic current-account surplus, the improvement in the Balance of Payments (BoP) may spur greater demand for the Yen as the world economic outlook remains clouded with high uncertainty.