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A Japanese lending giant says the Yen is set to appreciate against the Pound and Dollar over the coming months as low and stable interest rates in Japan finally prove supportive.

Mizuho says Japan continues to stand out for its relative lack of policy tightening, which it sees leading to relative outperformance on the economic front in coming quarters.

The Bank of Japan has tightened some aspects of its monetary policy stance - which has resulted in JPY outperformance - but has yet to signal interest rate hikes are likely, casting it adrift from other central banks that have frantically raised interest rates to try and bring inflation lower.

This divergence has long been cited as a downward pull on the Yen. But, with other central banks set to end their hiking cycles in 2023 the focus could turn to relative economic performance.

Where the UK and U.S. economies will slow owing to rising interest rates, Japan's will face no such headwind.

The Japanese economy is also tipped to benefit from the China re-opening which Mizuho says will boost both goods and services (in-bound tourism) exports.

"The economy is also enjoying a minor domestic post-Covid rebound in part helped by government subsidies. Fuel subsidies will support consumption," says Mizuho in a recent note.

The bank says the Yen will also derive support as a plunge in energy prices further improves Japan's trade balance.

Regarding the UK, Mizuho says falling energy prices will also underpin the UK economy, but it is still expected to register the steepest recession amongst its peers in 2023.

"The slide in energy prices will help limit the scale of the UK’s recession,

but the real income squeeze will nonetheless make consecutive quarters of negative growth hard to avoid. The peak to trough decline will be largest in the UK and the recovery will be slow," says Mizuho.

The Pound to Yen exchange rates is forecast by Mizuho at 160 by the end of the first quarter 2023, 159 by the end of the second, 157 by the end of the third and 160 by year-end.

Elsewhere, Dollar-Yen is forecast at 128, 123, 120 and 120 for the above timeframes.

Regarding the USD/JPY exchange rate, Mizuho says the downshift in U.S. inflation and 2yr UST yields will remain a support for JPY for most of 2023.

"Japanese policy expectations strike us as overdone, given our expectation of the policy rate ending the year at 0.0% but we see the U.S. leg as more or a driver," says the research note.