The Japanese Yen (JPY) remains under pressure against the US Dollar (USD), with USD/JPY trading just below the 160 level, according to Societe Generale strategists. Despite hawkish comments from Bank of Japan (BoJ) Governor Ueda, the Yen failed to gain support, as the market focus remains on the widening yield spreads between US Treasuries and Japanese Government Bonds (JGBs) [1].
Societe Generale highlights that the 2-year US Treasury/JGB spread has sharply rebounded, reversing 50% of its decline since June 25, moving from 333 basis points to 212 basis points. They warn that if the spread breaks above 270 basis points, it could open the way to 281/285 basis points, potentially extending Dollar strength against the Yen [1].
The strategists note that the Yen is undervalued from both a valuation and fundamental perspective. However, with Japanese monetary policy only just approaching the lower end of the neutral range at 1%—even if the BoJ hikes rates this month—the central bank and the Ministry of Finance face significant challenges in reversing the Yen's weakening trend. The $74 billion in dollar sales conducted by the BoJ between April 28 and May 27 have had little impact on stemming Yen depreciation [1].
Market positioning shows the short JPY base has expanded to 26% of open interest, compared to a net long position before the Iran conflict. Additionally, massive option expiries around key USD/JPY strikes—$11.4 billion at 159.00-90, $3 billion at 160.00, and $2.8 billion at 160.01-80—may temporarily anchor price action in the near term. Societe Generale cautions that a bullish breakout could occur if US Treasuries react strongly to upcoming payroll data [1].
CONCLUSION
The Japanese Yen continues to face significant headwinds from widening US-Japan yield spreads, despite hawkish signals from the BoJ. Market positioning and large option expiries may temporarily stabilize USD/JPY, but risks remain skewed toward further Yen weakness if US yields rise. The BoJ and MoF's interventions have so far failed to reverse the trend, highlighting ongoing challenges for Japanese policymakers.