Japan appears to have finally achieved its long-standing goal of strengthening the yen. Currency intervention, speculation about aggressive BoJ rate hikes, and renewed capital inflows have all helped drive the Japanese currency higher. Let’s examine the situation and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- US participation in currency interventions is a necessity.
- The Bank of Japan will take a more aggressive stance.
- Pension funds’ appetite for Japanese assets is growing.
- Long trades can be opened if the USD/JPY pair breaks through 154.4.
Weekly Fundamental Forecast for Yen
Perseverance pays off. Japan has finally achieved what the government had long dreamed of—strengthening the yen. The decline of USD/JPY to 7-month lows began with currency intervention and continued as fundamentals shifted and the pair broke below the 155 technical level, triggering massive liquidation of long trades and fueling the decline.
Scott Bessent has every reason to be proud of himself. According to the Treasury Secretary, US participation in the foreign exchange market intervention was necessary. Japan is the largest holder of US Treasuries, and its sale as part of currency interventions will lead to higher yields. At the same time, the yen’s weakness contributed to the devaluation of other Asian currencies, which undermined the competitiveness of US manufacturers.
Japan’s Foreign Securities Holdings
Source: Bloomberg.
Indeed, according to Japan’s Ministry of Finance, holdings of foreign securities fell by $87.8 billion at the end of the summer, roughly matching the scale of foreign exchange interventions at the turn of July and August.
However, previous interventions more often failed than succeeded in reversing the USDJPY pair. Tokyo needed to change the fundamentals. This was done effectively. First, Policy Board Member Hajime Takata hinted that the decision to raise rates by 25 basis points in September was not set in stone. The BoJ might act more aggressively. Then, Nomura Securities stated that the central bank would raise rates by a quarter of a point at each meeting—in September, October, and December.
The acceleration of the monetary tightening cycle is not the only driver behind the sharp decline in USD/JPY quotes. Rumors are circulating that the growing attractiveness of Japanese assets is prompting large institutional investors to buy them, which will contribute to capital inflows into Japan and a stronger yen.
Bond Yields in US and Japan
Source: Bloomberg.
The largest pension funds in Japan and Norway have signaled plans to increase their exposure to the world’s third-largest economy. In August, the GPIF held an unscheduled meeting for the first time in seven years, reportedly to discuss a potential reallocation of its assets. Norway’s GPFN, meanwhile, announced changes to its investment strategy. Previously, the fund allocated its portfolio based on each country’s share of the global economy; it will now allocate based on market capitalization. The shift could bring an additional $17 billion into Japanese securities, providing another potential source of support for the yen.
Weekly USDJPY Trading Plan
The issue of capital flows remains unresolved, while any meaningful shift in the fundamentals will ultimately depend on the Bank of Japan’s policy stance—which it has yet to clearly articulate. It is therefore quite possible that yen bulls are getting ahead of themselves. Against this backdrop, stronger-than-expected US inflation data could trigger a rebound in USD/JPY. If the price pierces the 154.4 resistance level, consider opening long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDJPY in real time mode
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