Goldman Sachs makes a 180-degree turn! Its 12-month target for the Japanese yen is raised from 165 to 150.

The outlook for the Japanese yen has taken a major turn. Goldman Sachs reversed its bearish stance established in July of this year and significantly raised its yen target price, increasing its 12-month forecast from 165 to 150, citing an accelerated shift in Japanese domestic policy and rising expectations of capital repatriation.

In her latest report, Goldman Sachs strategist Karen Reichgott Fishman simultaneously raised her three-month and six-month targets for the yen to 158 and 155, respectively. She pointed out that the Bank of Japan's accelerated pace of interest rate hikes and the increased likelihood of domestic capital flowing back to Japanese assets are the core drivers behind this significant revision of forecasts.

Fueled by a confluence of positive factors, the yen rose to a high of 158.28 per dollar on Friday. Japanese Finance Minister Satsuki Katayama previously revealed that US President Trump expressed concern about the yen's weakness during a meeting with Japanese Prime Minister Sanae Takaichi, a piece of news that also provided significant support for the yen.

Policy shift and capital repatriation: the two pillars of a bullish outlook

In its report, Fishman explained that the Bank of Japan's accelerated pace of interest rate hikes has had a dual effect: on the one hand, it has curbed the inflationary pressure brought about by expansionary fiscal policy, and on the other hand, it has correspondingly reduced the depreciation pressure on the yen.

Regarding capital flows, she pointed out that although the trend of domestic portfolio funds returning to China is still speculative, this possibility is rising, thus creating a "downside asymmetry" in the USD/JPY exchange rate, enhancing the attractiveness of the yen as a portfolio hedging tool.

"These developments have increased the attractiveness of going long on the yen, especially as a hedge against recession risks," Fishman wrote.

Wall Street institutions are rapidly converging on the bullish camp.

Goldman Sachs is not the only major institution to shift its stance. Bank of America had previously raised its year-end yen forecast to 149, aligning with Goldman Sachs' position. The successive adjustments to forecasts by these two major Wall Street institutions indicate a systemic shift in the market's mainstream assessment of the yen's medium-term trajectory.

However, Goldman Sachs maintains a cautious short-term stance at the tactical level. Fishman stated that the bank currently prefers to short the euro/yen (EUR/JPY) rather than directly go long the dollar/yen, a strategy choice reflecting its assessment that there is still some uncertainty regarding the recent dollar trend.

Cautious in the short term, bullish in the long term.

Despite a significant upward revision of its medium- to long-term targets, Goldman Sachs has explicitly stated that it will remain cautious in its near-term operations. This combined stance of "tactical caution and strategic bullishness" means that while investors are grasping the direction of the yen's appreciation, they still need to be aware of short-term volatility risks.

The Japanese yen has rebounded significantly from its recent lows, and if the dual benefits of policy and diplomacy continue to materialize, they could provide support for further yen appreciation. For global investors who include the yen in their hedge portfolios, the signal sent by Goldman Sachs' recent shift is worth paying close attention to.

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