2026-02-20 05:18:00
For months on end, it has been hard to ignore the political side of things when viewing the Japanese yen outlook. The snap election results earlier this month continued to put the focus on that, with intervention risks as high as ever at the moment. The general feeling is that the yen is ready to snap at any moment. And that will trigger Tokyo officials to step into the market.
At least for now, USD/JPY continues to hover closer to the 155 level. That feels like the generally accepted ceiling threshold for Japan’s ministry of finance, with there being a lack of verbal warnings as of late. But a further climb from here towards 160, and we are likely to see Tokyo officials come out to reprimand markets. Or perhaps even skip all that and go with actual intervention, since we’ve already gone through with ‘rate checks’ previously.
Considering all that, many analysts are still holding a more bearish view on the yen as such. The latest commentary from ANZ, Goldman Sachs, and BofA all point to a softer currency amid the ongoing macro picture. However, RBC is one to take on a more contrarian view in all of this. The firm argues that:
“We maintain a bullish view on the JPY over the next few months. We highlight a JGB shift that would destabilise fixed income and USD/JPY flows. We believe we are now in the early innings of such a rotation – in both rates and FX.
There are four parts to the Japanese rotation trade – incentives, breakevens, asset holdings, and expected flows. Two factors will determine the foreign JGB demand – duration equivalence and FX carry. Interest is rising. As the breakeven between the US and Japan falls in duration, significantly larger notional amounts will be applied to this trade – raising the FX impact. All point to a preferred habitat shift in rates – and a stronger yen. This is a long-cycle theme. We maintain USD/JPY for 147 end-26 and 135 end-2027.”
The standout in their note is that there is no mention of intervention or fiscal/political risks at all, which are the two key drivers of trading sentiment as of late. So, it definitely is an interesting perspective to say the least. I can see their argument point but it’s hard to just focus solely on rates alone when there are also other key factors driving the broader market mood.
I can imagine this being a good starting position in viewing the Japanese yen in the absence of other key drivers, or perhaps when markets adjust to stop punishing the currency. But in the short-term or until the next BOJ rate hike, it might be difficult to imagine that.
