Japanese Yen's Rising Sun Draws Sellers in GBP/JPY and Buyers in USD/JPY

"We have reopened the trade three times, hitting trailing stops to make profits each time" - TS Lombard.

Image © Leonid Andronov, Adobe Stock

The Japanese Yen has risen against most major currencies so far in the New Year but its latest rally divides opinion and has led some analysts to tip USD/JPY as a buy while prompting others to advocate selling GBP/JPY. 

The Yen was the top performing G10 currency for the week on Friday following gains of more than two percent against some counterparts and a broad rally.

This could be attributable to a wide array of tailwinds including a record current account surplus for November, though no one is more widely noted than ongoing speculation over Bank of Japan (BoJ) monetary policy. 

"We tend to doubt that any substantive 'review' could take place until after the new Governor and Board are in place," says Greg Anderson, global head of FX strategy at BMO Capital Markets, in a Thursday market commentary.

"So with all of that in mind, we would be tentative buyers of USDJPY at this moment," Anderson adds. 

Recent trade has been awash with speculation in media and markets about a possible BoJ decision to begin reviewing its monetary policy strategy as soon as the January meeting next week.

Above: USD/JPY shown at daily intervals. Click image for closer inspection.

In addition, rising inflation in Japan and market speculation have had the 10-year government bond yield testing the recently-increased upper limit of 0.5% throughout the week, leading the BoJ to announce multiple rounds of bond purchases in order to enforce the cap.

The cap exists as part of its Yield Curve Control policy but recent developments have prompted some analysts to expect another upward adjustment in the limit for the 10-year yield following next week's meeting. 

"We do not think the BOJ has the luxury of time to wait given the rampant bond buying they have been doing to defend the new cap. This is unsustainable, especially as bond market conditions have drastically worsened," says Mazen Issa, a senior FX strategist at TD Securities. 

"Moreover, Japan has for the first time in decades broad based inflation (see diffusion index) and a surge in the BOJ's preferred core-core measure which is now at a multi-decade high," Issa writes in a Friday research briefing.

TD Securities forecasts another increase in the yield limit to be announced by the end of March and a decline in USD/JPY to 122 as a response.

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Above: GBP/JPY shown at daily intervals. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

For others too December's increase of the yield limit marked the beginning of a "policy normalization" that can be expected to continue in what is a milestone development for both the Japanese Yen and global markets. 

"The widening of the BoJ trading band has mechanically moved rate differentials in the yen’s favour. Moreover, this likely means that Japanese institutions will continue to return capital to domestic bonds," says Skylar Montgomery Koning, a senior macro strategist at TS Lombard.

Japan is one of the world's largest nation state creditors - hence the earlier referenced current account surplus for November - and that is often said to be a symptom of the exceptionally low levels at which Japanese interest rates have been set for decades now.

But with interest rates elsewhere in the world already having risen sharply over the last year, the low level of rates and yields in Japan are now cited by Koning and TS Lombard colleagues as one reason to view the outlook as "asymmetrically skewed to Yen upside."

"We have been long JPY vs NZD since July 2022, tactically trading around Fed pivot expectations and as a hedge against BoJ capitulation. We have reopened the trade three times, hitting trailing stops to make profits each time," Koning writes in a Wednesday research briefing. 

"Given our changed view on NZD (see above) we do not reopen the trade and instead we sell GBP/JPY, noting on GBP previously that there is very little impetus for upside," she adds.