MUFG’s Head of Research Derek Halpenny argues the Japanese Yen would likely underperform if geopolitical risks escalate, with USD/JPY already sharply higher from last week’s low. However, he notes PM Takaichi’s prudent fiscal focus and improving JGB sentiment, including lower superlong yields despite a weak 20-year auction, should help limit Yen downside even if energy prices and geopolitical tensions rise further.

Geopolitics weigh but bonds support yen

"The yen would certainly be an under-performer in response to an attack on Iran. USD/JPY is now close to three big figures higher from the low last Thursday and suggests that the short yen positioning liquidation following the election victory for PM Takaichi is complete."

"PM Takaichi will give a key policy speech tomorrow and the details were summarised in a Nikkei news article and conveyed a continued focus on managing fiscal policy prudently. If that’s one of the key takeaways of the speech tomorrow it should help JGB sentiment."

"A 20-year JGB auction today, which revealed a weaker bid-to-cover ratio did not prompt selling and superlong yields are lower underlining the better JGB sentiment. That will help limit yen downside risks if geopolitical risks and energy prices were to escalate further from here."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)