The pace of the yen's depreciation is slowing, but a definitive trend reversal still awaits a decisive catalyst. In an analysis released on September 1, JPMorgan's global market strategy team noted that after the dollar-yen pair touched its medium-term target of 164, the decline eased. Coordinated intervention by Japan and the US in late July, coupled with rising market expectations for further rate hikes by the Bank of Japan (BOJ), have provided support for the currency.
However, from a fund flow perspective, bearish positions on the yen remain substantial. Since October 2025, cumulative net yen buying from the balance of payments has reached approximately ¥40.7 trillion. Yet, "off-balance-sheet" flows have seen net yen selling of around ¥57.1 trillion, leaving a net yen sell order of approximately ¥16.4 trillion after offsetting. JPMorgan believes that as long as the BOJ maintains a pace of roughly one rate hike per quarter and US monetary policy remains unchanged, the dollar-yen pair is likely to trade within a 155-165 range.
A real reversal could stem from a concentrated unwinding of yen short positions. JPMorgan estimates that current yen short positions are about 60%-80% of their peak in the summer of 2024. If a full-scale unwinding were triggered, the dollar-yen could fall by 14-18 yen, targeting the 142-146 range. The bank highlights four key signals to watch: renewed expectations for Fed rate cuts, accelerated BOJ hikes triggering a Japanese stock market correction, a significant increase in yen asset allocation by the Government Pension Investment Fund (GPIF), and expanded dollar intervention by the US.
Four pivotal triggers could spark a yen rally
If the dollar-yen breaks below 155 and moves further towards 150, JPMorgan suggests focusing on the following four factors. First, a resurgence in Fed rate cut expectations. A clear weakening of the US economy would compress US-Japan interest rate differentials and diminish the appeal of carry trades, prompting yen bears to exit.
Second, a faster pace of BOJ hikes leading to a stock market adjustment. If rate increases exceed expectations and cause Japanese equities to fall, overseas investors might unwind their prior yen short hedges, creating a chain reaction of "stock decline - position unwinding - yen buying."
Third, a major boost in yen asset allocation by the GPIF. If the GPIF further adjusts its basic portfolio to increase the weight of domestic bonds and stocks, potential yen buying could expand significantly. JPMorgan estimates that merely raising the weight of these two asset classes from a 25% midpoint to a 31% cap within the existing framework could generate over ¥30 trillion in fund flows. However, the GPIF is more likely to act as a "shock absorber" for the yen, and may not be sufficient on its own to rapidly push the dollar-yen below 155.
Fourth, expanded US dollar intervention. If the US shifts from intervening through cross-currency transactions to directly selling dollars, or expands the FIMA repo facility, the market impact could far exceed current expectations.
If short covering triggers a stampede, 142-146 could be the first target zone
Once the yen enters a short-covering rally, the appreciation could be significantly amplified. JPMorgan estimates that current yen short positions are around 60%-80% of the scale seen at the summer 2024 peak. At that time, an unexpected BOJ rate hike combined with US recession fears drove the dollar-yen down by as much as 23 yen.
If all short positions corresponding to that historical scale were covered, the dollar-yen could fall by 14-18 yen from current levels, corresponding to the 142-146 range. Furthermore, based on the 1-year USD/JPY swap spread, the current "fair value" of the exchange rate is estimated at around 144. This suggests that once short covering begins in earnest, the downside potential for the dollar-yen could be much larger than what mere policy expectation changes would imply.
Of course, the yen could also weaken again. If the BOJ's rate hikes are slower than expected, the market might re-embrace the narrative that "political pressures are constraining monetary policy normalization." And if the Fed maintains high rates or even turns hawkish again, the US-Japan rate differential could also widen once more.
Japan's fiscal risks remain an important variable. The government's expansionary fiscal policy continues to worry the market, with details on consumption tax cuts and defense spending financing still unclear. The massive ¥370 trillion public-private investment plan is also set to continue through fiscal year 2040. Additionally, BOJ rate hikes could increase government interest payments, raising the risk of a downgrade to Japan's sovereign debt rating.
Comments