When will the yen's depreciation reverse? JPMorgan Chase: 155-165 may become a trading range; four signals could trigger a sharp rise in the yen.

When will the yen's depreciation reverse? JPMorgan Chase: 155-165 may become a trading range; four signals could trigger a sharp rise in the yen.

The yen's depreciation is slowing, but a true trend reversal still lacks a key catalyst. JPMorgan's global market strategy team released an analysis on September 1st stating that the dollar's decline against the yen has eased after reaching its medium- to long-term target of 164. Coordinated intervention by Japan and the US at the end of July, along with rising market expectations for a Bank of Japan (BOJ) interest rate hike, have both provided support for the yen.

However, judging from capital flows, the short position in the yen remains substantial. Since October 2025, the balance of payments has seen a net purchase of approximately 40.7 trillion yen, but off-balance-sheet capital flows have resulted in a net sale of approximately 57.1 trillion yen, leaving a net yen sell order of approximately 16.4 trillion yen. JPMorgan Chase believes that as long as the BOJ maintains a roughly quarterly rate hike pattern and there are no major changes in US monetary policy, the USD/JPY exchange rate will likely remain within the 155-165 range.

A true reversal could come from a concentrated unwinding of yen short positions. JPMorgan estimates that current yen short positions are around 60%-80% of their peak in the summer of 2024. If a full-scale unwinding is triggered, the USD/JPY pair could fall by 14-18 yen, targeting the 142-146 range. Four key signals to watch are: rising expectations of a Fed rate cut, accelerated BOJ rate hikes triggering a correction in Japanese stocks, a significant increase in yen asset allocation by the GPIF (Government Pension Investment Fund of Japan), and expanded US intervention in the dollar.

Four signals that could trigger a surge in the yen

If the USD/JPY pair falls below 155 and continues towards 150, JPMorgan Chase believes the following four factors are most noteworthy:

First, expectations of a Federal Reserve rate cut have resurfaced. A significant weakening of the US economy will narrow the US-Japan interest rate differential and reduce the attractiveness of carry trades, prompting short sellers of the yen to exit the market.

Secondly, the accelerated pace of interest rate hikes by the Bank of Japan (BOJ) triggered a correction in Japanese stocks. If the rate hikes exceed expectations and cause Japanese stocks to fall, overseas investors may unwind their previous short yen hedging, creating a chain reaction of "stock decline - position closing - yen buying".

Third, the GPIF has significantly increased its allocation to yen assets. If the GPIF further adjusts its basic investment portfolio, increasing the weighting of domestic bonds and stocks, potential yen buying could expand significantly. JPMorgan estimates that simply raising the weighting of these two asset classes from the 25% central level to the 31% upper limit within the existing framework could generate more than 30 trillion yen in capital inflows.

However, GPIF is more like a "buffer" for the yen and may not be enough to push the USD/JPY exchange rate down quickly below 155 on its own.

Fourth, the US is expanding its dollar intervention. If the US shifts from intervening through cross-currency pairs to directly selling dollars, or expands the FIMA repurchase facility, the market impact could far exceed current expectations.

If short sellers sell off aggressively, the 142-146 range could become the first target area.

Once the yen enters a short-covering phase, its appreciation could be significantly amplified. JPMorgan estimates that the current size of yen short positions is approximately 60%-80% of the peak in the summer of 2024. At that time, the Bank of Japan's unexpected rate hike, coupled with concerns about a US economic recession, caused the dollar to fall by as much as 23 yen against the yen.

If all short positions corresponding to historically large proportions are closed, the USD/JPY exchange rate could fall by 14-18 yen, corresponding to a range of 142-146. Furthermore, based on the 1-year USD/JPY swap spread, the current "fair value" of the exchange rate is approximately 144. This means that once short selling begins, the downside potential for USD/JPY could be far greater than simply a change in policy expectations.

Of course, the yen could also weaken again. If the BOJ raises rates more slowly than expected, the market may re-trade the logic of "political pressure inhibiting monetary normalization"; if the Fed maintains high interest rates or even turns hawkish again, the USD/JPY interest rate differential could widen again.

Japan's fiscal risks are also a significant variable. The Japanese government's expansionary fiscal policy continues to worry the market; the reduction of the consumption tax and the financing of defense spending remain unclear, and the massive 370 trillion yen public-private investment plan will continue until fiscal year 2040. Furthermore, BOJ interest rate hikes could increase government interest payments and raise the risk of a downgrade in Japan's government bond rating.

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