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JPY: Goldman Sachs On Yen Outlook

JPY
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The US bank weighs in on the yen outlook, revising down its USD/JPY forecasts, but near term forecasts rest higher than current spot levels, see below for more details. 

Goldman Sachs: "Slow down, you move too fast. The initiation of the Fed’s cutting cycle was always going to be an important milestone, and coupled with the BoJ’s journey in the opposite direction (and Yen-supportive interventions earlier in the year), this development points in the direction of Yen strength. And markets have increasingly taken that view as a dovish Fed and rising growth concerns over recent months have pressed USD/JPY to retest its lows of the past year. But while we think gradual Yen strength is the right directional view, we think it will be a much slower process than consensus expectations or forward-market pricing—both because we think continued expansion in the US is more likely than imminent recession and because a very rapid Yen appreciation would prove self-defeating for the BoJ’s objective of restoring sustained positive inflation rates. Accordingly, we now see USD/JPY at 148 in 3 months, 145 in 6 months, and 140 in 12 months (vs. 155, 150, 150 previously). We also see more gradual appreciation over the longer-run to 135 in 2026 and 130 in 2027 (vs 125 and 120 previously). Despite slow appreciation over time, our forecasts imply nearer-term upside. More broadly, we think we may be approaching the limits of Dollar weakness on a dovish Fed alone (see USD bullet). But other factors also press against Yen strength. First, even if the Fed decides to continue cutting at a faster pace than currently priced, that should further reduce recession risk, pushing up equities and supporting long-end yields, mitigating any boost to JPY. Second, we expect CNY to face renewed weakness, an important anchor for most of Asia FX, including JPY. Finally, as long as US recession odds remain low, Japanese investors have a limited incentive to hedge US assets, even with a narrowing rate differential. So despite our economists now looking for sequential Fed cuts through mid-2025 and our relative rates forecasts implying USD/JPY a bit below current spot over the coming months, we see some limited near-term upside in USD/JPY." 

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The US bank weighs in on the yen outlook, revising down its USD/JPY forecasts, but near term forecasts rest higher than current spot levels, see below for more details. 

Goldman Sachs: "Slow down, you move too fast. The initiation of the Fed’s cutting cycle was always going to be an important milestone, and coupled with the BoJ’s journey in the opposite direction (and Yen-supportive interventions earlier in the year), this development points in the direction of Yen strength. And markets have increasingly taken that view as a dovish Fed and rising growth concerns over recent months have pressed USD/JPY to retest its lows of the past year. But while we think gradual Yen strength is the right directional view, we think it will be a much slower process than consensus expectations or forward-market pricing—both because we think continued expansion in the US is more likely than imminent recession and because a very rapid Yen appreciation would prove self-defeating for the BoJ’s objective of restoring sustained positive inflation rates. Accordingly, we now see USD/JPY at 148 in 3 months, 145 in 6 months, and 140 in 12 months (vs. 155, 150, 150 previously). We also see more gradual appreciation over the longer-run to 135 in 2026 and 130 in 2027 (vs 125 and 120 previously). Despite slow appreciation over time, our forecasts imply nearer-term upside. More broadly, we think we may be approaching the limits of Dollar weakness on a dovish Fed alone (see USD bullet). But other factors also press against Yen strength. First, even if the Fed decides to continue cutting at a faster pace than currently priced, that should further reduce recession risk, pushing up equities and supporting long-end yields, mitigating any boost to JPY. Second, we expect CNY to face renewed weakness, an important anchor for most of Asia FX, including JPY. Finally, as long as US recession odds remain low, Japanese investors have a limited incentive to hedge US assets, even with a narrowing rate differential. So despite our economists now looking for sequential Fed cuts through mid-2025 and our relative rates forecasts implying USD/JPY a bit below current spot over the coming months, we see some limited near-term upside in USD/JPY."