Societe Generale analysts highlight that the Japanese Yen remains significantly undervalued against the US Dollar, with the current USD/JPY exchange rate far above its purchasing power parity (PPP) fair value, which they estimate to be near 95 [1]. Despite this, the Yen continues to serve as a 'carry currency' due to its rate differential with other central banks, making it attractive for carry trades, although the advantage is less pronounced than in the past [1].
The analysts note that recent spikes in USD/JPY towards the 160 level were met with foreign exchange interventions, which only temporarily halted the Yen's depreciation [1]. They also point to a surging Nikkei index as a potential sign of improvement in Japan's economy, suggesting that the market's complacency with short-Yen positions could be at risk if Japanese authorities take action to guide USD/JPY lower [1].
Societe Generale suggests that the Bank of Japan (BoJ) and the Ministry of Finance (MoF) may intervene to help USD/JPY fall, but likely only to the 150 level, rather than the 140 level seen in previous corrections [1]. This indicates a possible shift in policy stance, which could impact carry trade strategies and market positioning [1].
CONCLUSION
Societe Generale sees the Yen as deeply undervalued and warns that persistent carry trades could be vulnerable if Japanese authorities act to strengthen the currency. While interventions have so far only provided temporary relief, a policy shift guiding USD/JPY toward 150 could disrupt current market dynamics. Investors should be cautious of complacency in short-Yen positions.