As the Japanese Yen slips towards 160.00, why are strategists still betting on it to strengthen?

Sentiment towards the Japanese Yen (JPY) points to a possible medium-term structural recovery, with investors increasingly focused on Bank of Japan (BoJ) policy normalisation, resilience in the domestic economy and greater currency intervention risks near the 160.00 threshold. The release of US Consumer Price Index (CPI) inflation data briefly sent USD/JPY back towards the key resistance zone of 159.00–160.00. However, robust Japanese manufacturing sentiment, sustained wage growth and growing demand for Japanese Government Bonds (JGBs) are reinforcing expectations that BoJ interest rates are moving towards neutral. Strategists at ING and MUFG see rising domestic yields and the threat of official intervention making the Yen increasingly appealing at prevailing levels, even as near-term US Dollar (USD) strength tests the upside in USD/JPY.

Can stronger Japanese data and stable 2% inflation clear the way for BoJ tightening? ING’s view

Solid corporate earnings, higher wages and AI-led demand for data centres are supporting an improvement in manufacturing sentiment, according to Chris Turner at ING. These developments reinforce the Bank of Japan’s assessment that inflation is sustainably anchored at 2.00%. Turner expects broad US Dollar strength could briefly bring technical resistance at 159.00 into play, but believes a rise beyond 160.00 would draw aggressive investor buying of cheap Yen.

"All of the above can feed into the Bank of Japan's view that inflation is now stable at 2.00% and its accommodative monetary policy can be reined in... The broadly strong dollar means that USD/JPY could easily push through resistance at 159, but we increasingly think investors will be looking to acquire cheap yen should USD/JPY push above 160 again."

Can JGB inflows and a BoJ nearing neutral support medium-term Yen gains? MUFG’s assessment

Despite US inflation figures sending USD/JPY back towards 160.00, Derek Halpenny at MUFG sees the medium-term balance of risks tilted firmly towards Yen appreciation, given the prospect of official intervention and strengthening sentiment in the JGB market. A BoJ approaching its neutral rate, alongside potential tax incentives to support domestic bond buying, gives Halpenny a compelling basis for expecting a sustained recovery in the Yen.

"The yen weakened sharply yesterday in response to the US inflation data and USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect... There continue to be signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate... There is also growing speculation that the government will soon make changes to incentivise JGB buying by including individual JGB holdings in tax-free NISA accounts and/or removing these holdings from inheritance tax... With intervention likely halting the prospects to the upside, and confidence in the BoJ improving, the risks certainly look more skewed to yen strength over the medium term."

Is the Yen nearing a turning point?

Domestic monetary normalisation and stronger JGB demand are starting to offset external yield pressures, bringing the Japanese Yen closer to a crucial turning point. ING cautions that near-term USD momentum could take USD/JPY towards 159.00. Nevertheless, ING and MUFG both see scope for a medium-term Yen recovery, supported by the threat of official intervention above 160.00 and a Bank of Japan only 1–2 rate hikes away from its neutral rate.

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