(Bloomberg) -- Yen’s rally on the back of Bank of Japan’s unexpected policy shift could soon run out of steam if forecasts for US yields next year are anything to go by.  

The average estimate in a Bloomberg survey of economists conducted between December 12 to 16 shows the 10-year Treasury yield could rise to 3.82% in the second quarter of 2023, up about 20 basis points from current levels. That means the spread between US and Japanese yields could widen, with the latter capped at 0.5%, and act as a headwind for the yen.

“We expect the path toward policy tightening in Japan to be slow and contained,” said Jane Foley, head of FX strategy at Rabobank in London, who sees the yen ending the second quarter at 130 per dollar. 

The US-Japan yield gap has been a key driver for the yen this year. Aggressive Federal Reserve rate hikes increasingly contrasted with Japan’s ultra-loose monetary policy, dragging the Japanese currency to the lowest in more than three decades in October. However, bullish yen bets regained momentum after the BOJ unexpectedly doubled its cap on 10-year yields to 0.5%.

The yen rallied the most since 2016 following the BOJ action and some analysts lifted their forecasts for the currency to 120 per dollar. Still, Foley’s view is less optimistic.

Further tweaks to the yield curve control policy are likely before any BOJ rate hike, she said. “Not only should this moderate the pace of further yen gains, but we expect to see pockets of dollar buying next year, which will likely limit the amount of headway the yen can make into the spring.”

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