A series of weak US data in July questioned the market narrative of a soft landing and brought back fears of recession. This was the main trigger, although a hawkish surprise from the BoJ undoubtedly added fuel to what turned out to be an unusually sharp unwinding of carry trades funded in JPY. The amount of exposure of these carry trades was at an all-time high due to the low level of overall market volatility and the volatility of the JPY itself. So is it over?
Key takeaways
- The Yen carry trade* is being unwound sharply due to weak US data and a hawkish surprise from the BoJ, with the Yen’s dislocation from its fundamentals remaining large.
- Weak global growth and the BoJ on diverging path from most Central Banks in the world are tailwinds for the JPY. A fast trade-weighted appreciation, though, would require 1) recession or 2) a persistent hike cycle from the BoJ.
- The repatriation of Japanese foreign assets is not a material risk for now, but its potential for a large market impact always warrants attention.
Our Q2 2025 target for USD JPY has been revised to 135 (from 140), and a gradual appreciation is expected from there - the Yen’s valuation remains cheap and its hedging properties in a slowing global economy have not budged by much. On the other hand, our view is that it is not yet time for cross-JPY adjustments to be too aggressive. For this, a much weaker global growth environment or a more pronounced hiking cycle from the BoJ would be necessary conditions.
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