When the old playbook stops working, it’s time to write a new one. The Japanese government appears to have concluded that the most effective way to support the yen is to reignite investors’ fears of capital repatriation. Let’s examine the latest developments and develop a trading strategy for the USD/JPY pair.
The article covers the following subjects:
Major Takeaways
- The Japanese government has spooked investors with capital repatriation.
- The BoJ’s rate hike fails to help the yen.
- The unwinding of the carry trade will affect the yen.
- Short positions on the USD/JPY pair can be opened if the price declines below 161.8 and 161.5.
Weekly Fundamental Forecast for Yen
Japan sought to demonstrate its resolve by spending ¥11.7 trillion on currency interventions in April and May, while repeatedly warning speculators against pushing the yen lower. Yet the market refused to back down. The USD/JPY pair climbed to a 40-year high, prompting policymakers to recognize that displays of force alone were not enough. A more sophisticated strategy was needed—and they appear to have found one.
No, this is not about the Bank of Japan adopting a more hawkish tone. Nor is it about Cabinet officials emphasizing that they have no intention of interfering with the BoJ’s monetary policy decisions. At first glance, both developments seem supportive of the yen. After all, speculation that Sanae Takaichi could pressure the central bank to keep interest rates low was one of the factors fueling the USD/JPY rally. If the BoJ’s independence is no longer in doubt, that should, in theory, provide support for the Japanese currency.
The reality, however, is more complicated. Over the past two years, the Bank of Japan has raised interest rates five times, a move that should have narrowed the policy gap with the Fed and pushed USD/JPY quotes lower. Instead, the pair continued to surge even after the BoJ abandoned negative interest rates.
Japanese Government Bond Yields
Source: Bloomberg.
The government has now adopted a far stronger strategy. It has begun raising the prospect of what global markets have long feared: large-scale capital repatriation to Japan. Finance Minister Satsuki Katayama has said the government will encourage Japanese pension funds, including the Government Pension Investment Fund (GPIF), to increase their allocations to domestic assets. The GPIF alone manages roughly $1.8 trillion, while Japanese investors hold an estimated $5 trillion in overseas assets. Should even a fraction of that capital begin flowing back from the US and Europe to Japan, the yen would receive a powerful boost against the world’s major currencies.
FX Volatility Index
Source: Bloomberg.
Another factor weighing on USD/JPY is the potential unwinding of carry trades. According to Goldman Sachs, conditions for carry strategies are the most favorable in two decades, largely because market volatility has fallen to its lowest level since 2022. However, growing uncertainty surrounding the Fed’s policy stance under Kevin Warsh, coupled with renewed tensions in the Middle East, is driving volatility higher.
As volatility rises, the appeal of carry trades diminishes. Investors are more likely to unwind existing positions, creating demand for traditional funding currencies such as the euro, the Swiss franc, and the Japanese yen.
By raising the prospect of capital repatriation, the Japanese government has added another source of support for USD/JPY bears, alongside the unwinding of carry trades.
Weekly USDJPY Trading Plan
Whether the pair will be able to develop a correction will depend on US inflation data. Weak data will likely put pressure on the US dollar, allowing investors to sell the USD/JPY pair if the price slides below the 161.8 and 161.5 support levels.
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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Source: Original Article
