Regardless of the measures the Japanese government has taken to support the yen, there is a risk of significant disappointment. Currency interventions have historically had limited impact, and capital repatriation takes time. Let’s examine the situation and develop a trading plan for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- Capital repatriation is a lengthy process.
- The Bank of Japan is moving too slowly.
- Currency interventions are largely ineffective.
- A rise followed by a pullback below 162.85 in the USD/JPY could signal an opportunity to sell.
Weekly Fundamental Forecast for Yen
Speculators remain unfazed by verbal warnings and currency interventions. The government’s plan to encourage pension funds to invest in domestic assets will take time to implement, while the Bank of Japan’s monetary tightening remains too gradual to weaken USD/JPY bulls. As a result, Kshitij Consultancy Services, one of the strongest yen forecasters in the second quarter, expects the US dollar to potentially rise toward ¥170.
With Japan’s stock market performing strongly, the government is seeking to encourage pension funds and households to increase investments in domestic assets. At first glance, Prime Minister Sanae Takaichi’s comments could have supported USD/JPY bears. Societe Generale estimates that the GPIF could purchase an additional $76 billion in government bonds, while Deutsche Bank estimates potential capital repatriation at $440 billion.
Yen and Other G10 Currencies Yields
Source: Bloomberg.
However, Finance Minister Satsuki Katayama takes a more cautious view. The government cannot force the GPIF to invest in Japanese assets, and capital repatriation requires time. As a result, investors remain focused on fiscal and monetary policy. Despite a 125-basis-point increase in the overnight rate, Japan’s yield gap with other G10 economies remains significant.
Against this backdrop, carry traders continue to use the yen as a low-yielding funding currency. The strategy is particularly attractive as Goldman Sachs describes current carry-trade conditions as among the most favorable in two decades. Low volatility and resilient stock markets, which have shown limited reaction to geopolitical risks, are supporting strong global risk appetite.
Net Dollar Position of Japanese Retail Investors
Source: Bloomberg.
As a result, the effectiveness of government currency interventions appears questionable. Rather than speculators, it may be the authorities who are fighting against market fundamentals. Meanwhile, the rise in retail traders’ net short positions on the US dollar to record levels suggests that Forex intervention may have limited success. Traders could simply use any yen appreciation as an opportunity to buy at more attractive levels, potentially triggering another sharp swing in USD/JPY similar to the moves seen in April and May.
The Bank of Japan’s gradual approach to monetary tightening is also failing to provide strong support for the yen. With roughly six months between rate hikes, carry traders continue to benefit from the wide interest-rate differential.
Weekly USDJPY Trading Plan
As USD/JPY quotes move higher, the risk of currency intervention increases. Therefore, a breakout above 162.85, followed by a pullback below it, could create a selling opportunity.
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.
