All signs continue to point towards a lower Japanese yen - SocGen

Societe Generale notes that while intervention threat persists, Japan has struggled to really shift the discourse in the yen outlook ever since 2022. Considering the current circumstances, the environment for a weaker yen currency looks set to persist for a bit longer.

The firm also argues that while intervention from Japan's ministry of finance may slow the trend, it won't lead to a material shift in sentiment for the time being. I reckon that line of thinking is quite well established even among market participants already. That as we see USD/JPY recover back to test the 160 mark this week.

"Neither rate trends, nor growth prospects are pointing to a sustained yen recovery yet. The Bank of Japan has now spent something in the order of $240b billion in FX intervention to cap USD/JPY, since mid-2022. USD/JPY has averaged 147 over that period.

Given that at that price the yen has been, on average, 35% undervalued relative to purchasing power parity, this represents a huge effort to avoid something that once upon a time, economists thought could only happen temporarily.

The challenge for the MOF and BOJ, is that despite 2-year JGB yields rising to their highest level since 1996, that’s still 2.7% below Treasury yields. The 1-year yield differential has narrowed, from above 4% to below 2%, but it too, remains big enough to keep Japanese investors in Treasuries. There is, therefore, a danger that the current unstable equilibrium (super-cheap yen, rising Japanese yields) can be sustained for a while longer.

It is much easier to imagine a significant yen revival in the event of a protracted period of slow (or no) US growth, than in imagining Japan can grow fast enough to life the yen on its own. In short, for now, intervention to cap USD/JPY is likely to continue but hoping for a turn in the USD/JPY trend, back towards 150 and beyond, is unrealistic."