Japanese Yen: Intervention risks limit further depreciation - OCBC

OCBC strategists Sim Moh Siong and Christopher Wong describe USD/JPY as a patience trade, with the pair supported by higher US yields and elevated energy prices but capped by extreme Japanese Yen undervaluation and rising intervention risks. They remain constructive longer term, seeing repatriation and higher domestic yields gradually supporting JPY appreciation despite GPIF’s lack of immediate asset allocation changes.

Patience trade with capped upside

"USD/JPY has traded sideways to slightly higher since the start of October, supported by rising US Treasury yields and elevated energy prices. Recent reports that Japan's Government Pension Investment Fund (GPIF) did not discuss asset allocation changes at its September meeting disappointed some JPY bulls, as investors had been hoping for signs of increased domestic bond allocations that could support the JPY."

"That said, with USD/JPY already trading in the 158s and concerns about official FX intervention likely to intensify as the pair moves higher, we expect upside momentum to remain constrained despite broad USD strength."

"Our longer-term view remains constructive on the JPY. Japan's currency continues to screen as deeply undervalued on several valuation metrics, and sustained higher domestic yields could gradually make Japanese assets more attractive to local investors."

"While there is still no evidence of an imminent shift in GPIF's investment strategy, we view the latest headlines as a postponement rather than a rejection of the broader repatriation narrative. As such, we continue to see scope for a gradual appreciation of the JPY over time."

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