Japanese Yen: Safe haven debate and fiscal backdrop – Rabobank

Rabobank’s Senior FX Strategist Jane Foley discusses whether the Japanese Yen (JPY) has regained safe haven characteristics after strong performance versus G10 peers. Foley links recent JPY support to FX intervention, Bank of Japan (BoJ) policy normalization, Japan’s fiscal metrics and domestic JGB ownership. Rabobank highlights potential BoJ tightening and maintains a 3‑month USD/JPY155.00 forecast.

Yen performance, BoJ policy and fiscal risks

"The JPY is the second best performing G10 currency in the half year to date after the NOK. It is the fourth best performing G10 currency in the year to date. Granted, significant amounts of FX intervention in favour of the JPY have been a notable factor in supporting it this year."

"Aside from signs that the JPY may have had some support from safe haven flows in recent days, the currency appeared to have lost this status in recent years. There are likely a few reasons for this, though in our view this is heavily linked with the end of the BoJ’s QQE policy in March 2024."

"Since the BoJ ended its QQE policy, its balance sheet has shrunk by almost 18%. In effect this has stripped JGB prices of their insulation from market forces. Higher inflation in Japan and fears about the reflationary biases of PM Takaichi which, were for a while exacerbated by market fears that the BoJ would bow to political pressure not to tighten policy, have pushed JGB yields higher."

"These factors, combined with the likelihood of another 25-bps rate hike from the BoJ at the December policy meeting suggests a strong potential for the JPY to hold its own in 2027 vs. other G10 currencies. We retain a 3-month forecast of USD/JPY 155.00."

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