HSBC strategists argue that the USD/JPY pair is trading near its highest level in around 40 years and may have shifted into a new, higher range. They expect further US Dollar (USD) strength versus Japanese Yen (JPY) through mid-2027, assuming wide US-Japan rate differentials persist and the Ministry of Finance only intervenes selectively to curb excessive JPY weakness.

USD/JPY seen in higher trading band

"We changed our broad USD view after the 17 June FOMC meeting and now expect the US Dollar Index (DXY) to trade in a new and higher range. In line with this, we also anticipate further USD strength versus JPY through mid-2027."

"Our view assumes the Bank of Japan (BoJ) will avoid rapid, hawkish rate hikes, keeping nominal and real US-Japan rate differentials wide. We also expect fiscal concerns to persist as authorities use fiscal policy to curb cost of living pressures, boost investment and strengthen defence."

"Finally, we think the Ministry of Finance (MoF) will continue resisting unfettered JPY depreciation. A weaker JPY remains unpopular with the Japanese public and raises the risk of renewed “triple sell” episodes across JPY, equities and bonds."

"We see several plausible reasons for this slightly higher bar for intervention. The short-term “fair” value of USD/JPY, based on its correlations with underlying variables including the broad USD trend, has likely shifted higher alongside the recent rise in the DXY."

"Lower oil prices also reduce the urgency to curb imported inflation compared to March-May. In addition, the MoF also typically aims to surprise the market, and past episodes suggest subsequent intervention waves can occur at incrementally higher levels (e.g. 1998, 2022 and 2024)."

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