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Goldman's On JPY

JPY

JPY took another hard round-trip on Friday after another apparent large-scale intervention. On the one hand, Japan’s current policy mix is clearly unsustainable; it is intervening in both the fixed income and foreign exchange markets, firmly entrenched in the classic “open-economy trilemma,” as our economists explained this week. But, while ultimately unsustainable, it is “working” to some degree. As we discussed last week, the yen’s beta to US rates has fallen since the first intervention operation, and repeated intervention steps will likely keep it that way for a while, in part by inducing two-way volatility into USD/JPY.


While sub-optimal and unsustainable in the medium term, we think this policy mix could be in place for some time. After all, the extent to which the end of the BoJ’s YCC policy will strengthen the Yen will depend largely on the exact strategy that is chosen to replace it. And it is probably appropriate for the BoJ to maintain a much easier monetary policy—inflation is picking up but underlying trends are still soft (our economists expect YCC to remain in place at least through the end of Kuroda’s term, and potentially much longer).


Most importantly, the Dollar is currently on a broad appreciation trend of historic proportions, which we think could last a little while longer. So it may not be unreasonable for Japan’s policymakers to use the resources at its disposal to try to buy time and limit the speed of JPY depreciation as much as possible. In the meantime, in a macro backdrop of more Fed hikes, higher global rates (ex-Japan), and our economists’ forecast of a relatively soft landing, the trend in USD/JPY should still be higher.

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