USD/JPY Sees Shift in Tides as Yen Finds New Footing
The Japanese yen has long been viewed as undervalued, but recent developments are changing its fortunes. The Bank of Japan's accelerated pace of rate hikes is helping to stabilize the term premium and making it more attractive for investors to turn their attention back to domestic assets.
This shift in policy has reduced some of the inflationary sting from expansionary fiscal policy and has chipped away at the reasons why the yen was initially cheap. As a result, the upside for the USD/JPY pair is no longer as clean, with intervention risk remaining a concern, particularly with Washington and Tokyo sharing concerns over yen undervaluation.
However, the downside now has several more doors through which it can enter, including a genuine portfolio reallocation, a faster Bank of Japan, or a Federal Reserve that fails to deliver on its current pricing. Global growth also remains a wildcard, and if it starts to wobble, the yen could become an attractive portfolio insurance option.
The USD/JPY pair still has room to grind higher, but the distribution has changed, with the 158 area now seen as a tactical level rather than a longer-term target. The longer horizon is bending lower towards 155 and then 150, driven by valuation finally having something behind it other than hope.