Deutsche Bank: The weakness of the yen is a joint result of policy and capital, and the possibility of short-term government intervention is low.

Deutsche Bank's latest report points out that the continued weakening of the yen is the result of both "policy acquiescence" and "capital outflows." The possibility of short-term forex intervention is low.

According to Chasing Wind Trading Desk, the report analyzes that although Japan's current account surplus has risen to a historic high of 6% of GDP and its basic international balance is also strong, indicating the yen is significantly undervalued, policymakers prefer to maintain a loose environment, while domestic enterprises and institutional investors continue to allocate funds to overseas assets. This dual logic of "capital outflow + policy easing" may continue in the coming months.

The undervaluation of the yen is particularly evident in external account data: the current account surplus is mainly supported by growth in the income account, and net securities investment has turned positive, partly due to foreign investors increasing their holdings of Japanese assets as JGB yields rise and the stock market strengthens. However, Japanese companies' overseas direct investment remains close to 2% of GDP, and institutional investors continue to increase their holdings of foreign stocks and bonds, highlighting insufficient domestic confidence.

The report further points out that the current USD/JPY exchange rate is about 7-8% higher than the level implied by the US 10-year Treasury yield, reflecting a clearly priced-in "policy risk premium" in the market. Although the weak yen deviates from fundamentals, due to still-moderate volatility and lack of heavily concentrated speculative positions, there is little urgency for government intervention.

Record Current Account Surplus Underscores Yen Undervaluation

The report states, Japan’s current account surplus has climbed to a historic high, clearly showing the yen’s significant undervaluation. Driven by yen denomination, both income and trade scales have expanded simultaneously, with growth mainly sourced from the income account led by foreign direct investment, while the trade deficit has largely disappeared.

Basic international balance also remains robust, with net securities investment back to inflow status. This shift is mainly due to increased foreign exposure to Japanese assets: as Japanese government bond yields rise and the stock market performs strongly, international funds, including sovereign reserve managers, continue to increase holdings of Japanese bonds and equities.

Japanese Companies and Institutional Investors Continue to Exit Domestic Market

Although Japan’s external accounts data is strong, Japanese domestic companies and institutional investors remain lacking in confidence in the local market. Japanese companies continue to invest funds overseas, with net overseas direct investment approaching 2% of GDP, at a historic high, and external economic and trade pressure may further intensify this trend.

It is noteworthy that direct investment earnings gained overseas by Japanese companies have not been fully repatriated to yen assets. Data shows about half of overseas income is reinvested, and even for the "repatriable" portion, a significant share remains in foreign currencies on corporate accounts.

Institutional investor behavior also points to capital outflows. In Q4 2025, under the NISA (small investment tax-exempt system), investment trusts continued to increase holdings in foreign stocks; pension funds, though selling off some assets, shifted funds mainly toward foreign bonds. Meanwhile, life insurance companies did not significantly increase holdings of Japanese government bonds, indicating there has not been a structural return to domestic fixed income assets among institutions.

Policy Preference Remains for Easing Stance

Even with Japan’s obvious capital outflow trend, its strong broad basic international balance still reflects a clearly priced-in policy risk premium in the exchange rate. At present, USD/JPY is around 7-8% above the level implied by the US 10-year Treasury yield, with an even greater gap if measured by relative interest rates.

The report states that the likelihood of Japanese authorities intervening in the foreign exchange market in the short term is low. Policymakers focus on the degree of deviation in exchange rates from fundamentals, the speed of volatility, and the concentration of speculative positions, with only the first condition currently somewhat met. Deutsche Bank’s composite “overshoot indicator” does not show the exchange rate as urgently requiring intervention.

In the current political environment, Japanese policymakers prefer to maintain loose fiscal and monetary policy, which is unlikely to change in the short term. As long as the ongoing weakness of the yen does not trigger significant domestic voter discontent, current policy orientation and exchange rate trends are likely to continue.

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The above highlights are from Chasing Wind Trading Desk.

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