The Japanese yen has recorded its strongest three-day rally since August 2024, but this is still insufficient for Citi strategist Daniel Tobon to immediately turn bullish on the currency. He stated that for the upward trend to continue, Japanese investors need to start redirecting funds back into the domestic bond market. "We are waiting for that critical turning point, waiting to see the moment when the flow of funds shifts," Tobon said in an interview. "Once this trend is confirmed, the yen's subsequent appreciation potential could exceed 15%."
The trigger for this yen rebound was market speculation that Japan and the United States are preparing to take action to support the yen's exchange rate—this came after the yen briefly approached the 160 level against the U.S. dollar, a point close to the level at which Japanese authorities intervened in the market in 2024. On Tuesday, the yen appreciated another 1% against the dollar, with the exchange rate falling below the 153 mark.
The yen's sharp reversal upward is underpinned by last week's sell-off in the Japanese government bond (JGB) market: concerns that Japanese Prime Minister Sanae Takaichi's fiscal plans could further exacerbate Japan's already high government debt burden triggered a sustained sell-off in government bonds. The bond market sell-off caused Japanese government bond yields to surge significantly, which may incentivize investors to repatriate funds from overseas and reinvest them domestically.
This also increases the possibility of hedge funds unwinding carry trades—transactions that involve borrowing at low interest rates in Japan and then investing the funds in countries with higher interest rates. Tobon pointed out that he still sees a risk of the yen beginning to weaken again before next month's general election. He stated, "If I see domestic funds starting to flow back into Japanese government bonds, that could be a stronger signal that it is time to buy the yen, as this would begin to alleviate fiscal concerns. This could happen soon after the election, or it might take longer."
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