Contrary to our expectations of a smooth rally throughout the year, the Japanese yen broadly weakened against the US dollar over the first quarter of 2021. Most of the yen’s underperformance is attributable to a stronger dollar as markets aggressively priced in a faster economic recovery and sooner-than-signalled monetary policy normalisation from the Federal Reserve. The outstanding weakness of the yen among its G10 peers is linked to frozen Japanese yields on the back of the prolonged ultra-accommodative policy by the Bank of Japan, which was eased further in the March meeting. As much of these dynamics are already priced in the one-year high USDJPY current levels, we believe the yen is poised to pare back some of its lost ground later in the year as the economy catches up, but the rally is expected to be slow. However, as vaccination in Japan lags and the economy enters Q2 with lost momentum, risks to this outlook are tilted to the downside.