Goldman Sachs has updated its forecasts for the dollar-yen currency pair, increasing its near- and medium-term projections. The bank now expects USD/JPY to reach 162 in three months, 163 in six months, and 165 in 12 months. This is an increase from their previous targets of 160, 158, and 155 respectively. Key drivers for this revision include the expectation of higher-for-longer U.S. yields, a low risk of a U.S. recession, ongoing fiscal pressures in Japan, and the Bank of Japan's incremental approach to policy adjustments.
Goldman Sachs indicated that while intervention by the Japanese Ministry of Finance could temporarily slow the yen's depreciation, it is unlikely to reverse the fundamental trend without an unexpected negative U.S. growth shock or a more aggressive tightening from the Bank of Japan. The firm drew parallels to the April 2024 intervention, noting that the yen tended to resume its upward trajectory against the dollar within weeks after such operations. The bank views both a significant U.S. recession and a faster pace of BoJ tightening as improbable over the next year.
The bank continues to advocate using the yen as a funding currency for high-carry emerging market positions. They highlighted concerns that Japan's stimulus plans are adding to inflationary and fiscal pressures, which are expected to elevate the term premium on Japanese government bond yields relative to U.S. Treasury yields. Goldman observed that in weeks where Japan's term premium rose against the U.S., USD/JPY gained approximately 0.35% on average, with gains around 0.60% when moves in both term premium and the differential exceeded one standard deviation.
Recent data from the Commodity Futures Trading Commission shows that bearish positions on the yen by leveraged funds have surged to over 115,000 contracts in the week ending June 9, marking a nine-year high since November 2017. This surge indicates a revival of the yen carry trade despite intervention risks. Analysts further suggest that with the yen crossing the 162-per-dollar level, 165 yen/dollar is increasingly seen as the next intervention threshold for Japanese authorities, who may opt to keep their "powder dry" until higher levels to maximize intervention impact.
