The Japanese Yen (JPY) recently experienced a notable rally, with the USD/JPY currency pair briefly dropping to a seven-month low near 152.89 before rebounding above 154.00. Key technical levels are identified, with support around 152.00 and resistance at 155.00 [1]. According to Brown Brothers Harriman’s (BBH) Elias Haddad, this Yen strength is primarily flow-driven, rather than a result of a hawkish repricing by the Bank of Japan (BoJ). The rally has been supported by possible repatriation flows from Japan’s government pension fund (GPIF) and an unwind of speculative net short JPY positions [1].
Haddad outlines several policy scenarios for the upcoming Federal Reserve (Fed) and BoJ rate decisions, with risks skewed toward further Yen appreciation. The scenarios include: (1) Fed hold and BoJ +25bps hike leading to USD/JPY moving lower; (2) Fed hold and BoJ +50bps hike resulting in a sharp drop in USD/JPY; (3) Fed +25bps and BoJ +25bps causing a USD/JPY rebound; and (4) Fed +25bps and BoJ +50bps leading to USD/JPY moving lower [1].
Recent Japanese wage data was mixed. Total nominal wage growth accelerated to 4.7% year-over-year in July (consensus: 3.8%), up from 4.0% in June and marking the fastest pace since 1997. However, scheduled pay growth for full-time workers slowed unexpectedly to 2.7% year-over-year (consensus: 2.9%), down from 2.9% in June [1].
BBH does not rule out a significant 50 basis point BoJ hike at the next meeting, which could re-anchor inflation expectations, cap the long end of the Japanese government bond (JGB) yield curve, and further accelerate the Yen’s recovery. Inflation expectations are cited as the main driver behind the recent rise in 10-year JGB yields [1].
CONCLUSION
The Japanese Yen’s recent rally is attributed to flow dynamics and positioning rather than a shift in BoJ policy. Upcoming Fed and BoJ decisions are expected to be pivotal, with a larger-than-expected BoJ hike potentially triggering further Yen strength. Market participants are closely watching these developments for their impact on USD/JPY.