USD/JPY bears have little reason to count on the Fed. Instead of attracting capital, Japan risks facing capital outflows, while the BoJ’s reluctance to act continues to weigh heavily on the yen. Is there a way out? Let’s examine the latest developments and develop a trading strategy.
The article covers the following subjects:
Major Takeaways
- The Fed’s decisions may not affect USDJPY.
- The Bank of Japan has to remain cautious.
- The GPIF has no intention of helping the government.
- Consider selling the USDJPY pair if it drops below 163.35.
Weekly Fundamental Forecast for Yen
The longer the government delays intervention, and the Bank of Japan hesitates to accelerate its monetary tightening cycle, the higher the USD/JPY pair climbs. The outlook for the yen remains bleak, leaving it largely dependent on domestic policymakers. The Fed is unlikely to provide any meaningful support for Japan’s currency. Whatever decision it makes, the yen is unlikely to find much relief in the near term.
Indeed, an unexpected increase in the federal funds rate would widen the yield gap between US and Japanese bonds, giving USDJPY another boost. On the other hand, if the Fed leaves rates unchanged, global risk appetite is likely to improve. In a low-volatility environment, the yen will remain a preferred funding currency for carry trades. Either way, neither the Japanese government nor the Bank of Japan can expect much help from the Federal Reserve.
Japan’s Inflation Rates
Source: Bloomberg.
The Fed may still offer support, but USD/JPY bulls should not let their guard down. The biggest threats to the pair’s rally remain currency intervention and a faster pace of monetary tightening by the BoJ. There are reasons to take that risk seriously. After several months of easing, Japan’s inflation accelerated in June, while the rally in Brent crude could push import costs and consumer prices even higher.
Unfortunately, Kazuo Ueda and his colleagues are unlikely to take decisive action. Inflation is only one side of the equation. Speeding up the BoJ’s tightening cycle would push bond yields higher and increase the government’s debt-servicing burden. At the same time, Prime Minister Sanae Takaichi’s approval rating has fallen to its lowest level since she took office, putting pressure on her to deliver on campaign promises. Plans to cut the consumption tax to 1% over the next two years have already unnerved investors in both the bond and currency markets. With Japan’s debt burden already at record levels, investors are increasingly questioning how such measures would be financed.
The government is also unlikely to get any help from one of the world’s largest pension funds. Speculation that the GPIF could increase its allocation to Japanese assets in its ¥293 trillion portfolio briefly raised hopes among USDJPY bears. However, the fund has made it clear that its investment decisions will be guided solely by the long-term interests of its beneficiaries.
Investment Inflows into Japanese Equities
Source: Bloomberg.
Instead of attracting capital, Japan risks capital outflows as the weakening yen raises the likelihood of foreign investors pulling money out of the country. Most of these investments were left unhedged against currency risk. As a result, there is little reason to expect a large-scale closure of long USD/JPY positions.
Weekly USDJPY Trading Plan
Currency intervention may be Japan’s only remaining option. The yen is unlikely to recover on its own. Regardless of the Fed’s decision, the BoJ’s reluctance to tighten policy further and the risk of capital outflows continue to weigh on the currency. If the USD/JPY pair falls below 163.35, short trades can be considered.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
