Japanese Yen: What do the safe-haven debate and fiscal backdrop signal? – Rabobank

The Japanese Yen’s (JPY) strong showing against its G10 peers has raised the question of whether it has recovered its safe-haven characteristics, a topic examined by Rabobank’s Senior FX Strategist Jane Foley. In assessing recent support for the JPY, Foley points to FX intervention, policy normalisation at the Bank of Japan (BoJ), Japan’s fiscal metrics and domestic ownership of JGBs. With further BoJ tightening a possibility, Rabobank retains its 3‑month forecast of USD/JPY 155.00.

How do BoJ policy and fiscal risks shape the Yen’s performance?

"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.)