Goldman Sachs has significantly cut its USD/JPY forecasts, now expecting the yen to reach 158 in three months, 155 in six months, and 150 in 12 months. This marks a notable shift from its earlier predictions of 162, 163, and 165 for the same periods, and a complete reversal of its previously bearish stance on the yen. The primary drivers for this change are a more aggressive Bank of Japan (BOJ) policy, including a recent rate hike to 1.25%, and the increasing likelihood of Japanese investors repatriating capital.
The bank's revised outlook is influenced by BOJ Governor Kazuo Ueda's declaration of a new policy phase focused on stable 2% inflation, which is seen as offsetting the inflationary impact of Japan's expansionary fiscal policy. Additionally, Goldman strategists, including Karen Reichgott Fishman, believe that rising odds of Japanese investors moving their portfolios back into domestic assets will contribute to the yen's strength. The threat of further intervention by Japanese authorities, as well as the US Treasury's previous yen purchases to contain borrowing costs, are also expected to cap the dollar's gains against the yen.
While Goldman acknowledges that the capital repatriation story is still largely speculative, it sees the probability rising, making long yen positions attractive, particularly as a hedge against recession risk. Tactically, Goldman favors selling the euro against the yen over selling the dollar directly, as it allows for yen strength without relying on a shift in US yields. This updated forecast comes as the market has seen USD/JPY climbing towards 160, supported by US 10-year yields above 5.2%.
