Japanese Yen: Domestic flows suggest support over the medium term – MUFG

Following the US CPI release, USD/JPY has moved back towards 160, leaving intervention risks elevated, according to Derek Halpenny at MUFG. Despite a sell-off in JGBs, sentiment is improving as household demand strengthens and potential tax incentives offer support.

Rising household JGB demand underpins yen outlook

"The yen weakened sharply yesterday in response to the US inflation data and USD/JPY has returned closer to the 160-level, above which intervention becomes a much greater prospect."

"There continue to be signs that confidence in the JGB market has improved, no doubt helped by the more active BoJ and the general consensus that within one or two hikes, the BoJ would be at the neutral policy rate."

"There is also growing speculation that the government will soon make changes to incentivise JGB buying by including individual JGB holdings in tax-free NISA accounts and/or removing these holdings from inheritance tax."

"Early signs of a shift in flows perhaps, and the more examples of this we start to see the more compelling the case will become of a more sustained turnaround in the multi-year trend of yen weakness. With intervention likely halting the prospects to the upside, and confidence in the BoJ improving, the risks certainly look more skewed to yen strength over the medium term."

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