"Historically undervalued" still hard to call the bottom; Goldman Sachs lowers yen target price to 165.

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As the global foreign exchange market re-prices the divergence between US and Japanese monetary policies, Goldman Sachs further increases its bearish outlook on the yen.

On July 6, Kamakshya Trivedi, Global Head of FX and Rates at Goldman Sachs, stated, the bank has significantly raised its 12-month USD/JPY forecast from 155 to 165, and said that the current valuation of the yen is at a “historically undervalued” level. This means that Goldman Sachs believes the yen’s current weakness is not due to short-term market sentiment, but is fundamentally driven, and there is further room for depreciation over the next year.

This assessment reflects Goldman Sachs’ latest evaluation of the US-Japan monetary policy trajectory: The pace of Federal Reserve rate cuts will be slower than previously expected by the market, while normalization of the Bank of Japan’s policy will have difficulty quickly narrowing the interest rate gap between the two countries. In this context, the market’s expectation of a trend reversal for the yen may need to be recalibrated.

The US-Japan interest rate gap remains the core variable determining exchange rate trends

The main logic behind Goldman Sachs’ significant USD/JPY forecast adjustment remains the continued divergence in US-Japan monetary policy.

On the US side, Goldman Sachs’ recent macro view holds that influenced by the new Fed Chair Walsh’s hawkish stance and resilient inflation, the Fed’s rate cut path has been further postponed, with the last two rate cuts possibly delayed until 2027. This means the US dollar interest rate will remain high for a longer period, providing sustained support for the dollar.

By contrast, although the Bank of Japan has ended its negative interest rate policy and is moving toward normalization, it remains cautious in raising rates, and Japanese interest rates are unlikely to catch up with those in the US. As long as the US-Japan interest rate gap stays elevated, carry trades based on the gap remain attractive, and the yen will be structurally pressured.

Tactical allocation value remains, but hard to change medium- to long-term weakness

It is worth noting that although Goldman Sachs has downgraded its medium- to long-term forecast for the yen, it still recommends yen allocation in its latest cross-asset strategy.

The reason is that the yen still possesses the traditional characteristics of a safe-haven currency. When the global economy faces growth shocks, geopolitical risks escalate, or market risk appetite falls sharply, the yen usually benefits from inflows of safe-haven capital, acting defensively alongside gold and the US dollar.

However, Goldman Sachs believes this demand for safe haven is more of a tactical trading opportunity and is insufficient to change the medium- to long-term exchange rate trend determined by the interest rate gap. Under a normal macro environment, as long as the US-Japan interest rate gap remains high, any yen rebound will more likely be a short-term correction rather than a trend reversal.

Risk warning and disclaimerThe market carries risks and investments should be made cautiously. This article does not constitute personal investment advice and has not accounted for individual users’ unique investment objectives, financial situations, or needs. Users should consider whether any opinions, perspectives, or conclusions in this article suit their particular circumstances. Investments made based on this article are at your own risk. ```