USD/JPY Could Break Above ¥160: Three Key Factors to Watch in Assessing the Yen’s Downside, Says Nomura Securities’ Goto Yujiro (後藤 祐二朗)

USD/JPY briefly rose to the upper ¥159 range, renewing its year-to-date high. The turmoil surrounding Iran is intensifying downward pressure on the yen through higher oil prices, and some point to a continued period in which rising oil prices support yen depreciation through supply-and-demand factors. Market sentiment remains unstable, as reflected in the rise in the VIX. Although the yen has not yet come under broad-based selling pressure, the view is that the risk of yen depreciation tends to increase when oil prices are rising.

The first of the three key points is the risk of rising inflation expectations and the Bank of Japan’s response. If higher oil prices persist, policy decisions by major central banks, including the Bank of Japan, could intensify downward pressure on the yen, making it a key question whether rising inflation expectations will prompt an early rate hike. Japan’s long-term inflation expectations remain limited at present, but downward pressure on the yen could change depending on the course of monetary policy.

The second is bond-market instability and the factors that could encourage intervention. Inflation expectations and the Bank of Japan’s response will affect bond-market stability, and if instability intensifies again, the possibility of yen-buying intervention could resurface. Conditions in the Japanese and US bond markets are attracting attention as factors that could influence the yen’s movements.

The third is the potential for an acceleration in the unwinding of carry-trade positions. As market volatility rises, there could be periods in which adjustments to carry-basket positions trigger yen buying to cover short positions. The current view is that the scope for a yen-carry unwind is limited, but this could change depending on the direction of volatility.