JPY Strength Driven by Flows, Not Hawkish BoJ Repricing

The Japanese Yen has seen significant gains against the US Dollar in recent times, with USD/JPY hitting a seven-month low near 152.89 before rebounding above 154.00. According to Elias Haddad of Brown Brothers Harriman (BBH), this strength is flow-driven rather than a result of hawkish Bank of Japan (BoJ) repricing.

Haddad notes that the recent JPY rally has come despite no meaningful BoJ repricing and a modest pullback in longer-term Japanese Government Bond yields. This suggests that the rise is due to factors such as possible repatriation flows by Japan's government pension fund (GPIF) and an unwind of speculative net short JPY positions.

The sustainability of the USD/JPY plunge hinges on next week's Fed and BoJ rate decisions, with risks skewed towards a stronger JPY. Haddad outlines four possible scenarios: Fed hold, BoJ +25bps; Fed hold, BoJ +50bps; Fed +25bps, BoJ +25bps; and Fed +25bps, BoJ +50bps.

Japan's July wage data was mixed, with total nominal wage growth quickening more than expected to 4.7% y/y (consensus: 3.8%) vs. 4.0% in June, the fastest pace since 1997. However, scheduled pay growth for full-time workers unexpectedly slowed to 2.7% y/y (consensus: 2.9%) vs. 2.9% in June.

A jumbo 50bps BoJ hike next week cannot be ruled out, according to Haddad, who notes that inflation expectations account for most of the rise in 10-year JGB yields. A larger hike could re-anchor inflation expectations, cap the long end of the curve, and turbocharge the JPY recovery.