In two of our recent opinion pieces in Aug, we had detailed why the winds of change for JPY was imminent. Yen has rallied by about 3% over the course of a couple trading days, likely in part due to the rising probability of domestic policy shifts that could meaningfully strengthen the Yen, as well as the higher perceived risk of intervention following a possible “rate check” on September 2. We believe that a faster pace of BoJ hikes or signs of rotation back towards Japanese assets could keep the Yen stronger for longer even without a shift in the global macro backdrop. We will be watching the International Transactions in Securities (ITS) data for August, which offers investor-level detail on foreign asset flows, will be released on September 7 for any clues in change to inward flows. Taking both macros & flows in to account, the case to be tactically long JPY has strengthened (despite the risk of some pullback after a sharp move). But the clearer improvement in asymmetry over a longer horizon now makes short USD/JPY a more attractive hedge for pro-risk portfolios than it has been in a long time. The overarching point for us is that Japanese policymakers appear to be focused on pulling the available levers to attract capital inflows, and there is plenty of capacity to conduct additional interventions to further reduce JPY short positioning along the way. We believe there may be a fairly sizeable JPY short position that was built up after the launch of the Takaichi administration in October last year, amid concerns over the administration’s economic policies. Our estimates suggest JPY shorts amount to ¥16–17 trillion, and if this position were to be fully unwound, USD/JPY could fall to the 142–146 range. GPIF is the elephant in the room. The fact that a report on basic portfolio verification was presented at the 21st August Management Committee, can be viewed as an early sign of a potential basic portfolio change. Our estimates suggest GPIF may have been a net buyer of foreign bonds by about ¥0.9 trillion and a net seller of foreign equities by about ¥1.7 trillion. A large deviation from these estimates could serve as a signal that GPIF’s portfolio is changing. Hence the monthly flow data on 7th Sep becomes more important to understand the flow dynamics. We also estimate that even without a basic portfolio change, if GPIF were to raise the weight of yen assets (domestic equities and bonds) toward the upper end of the current range, it could generate JPY buying / foreign-currency selling flows of more than ¥30 trillion at maximum. By contrast, if GPIF were to change the basic portfolio and raise the share of yen denominated assets, it could not only generate even larger JPY-buying / foreign-currency selling flows, but the announcement effect could also trigger a significant short-covering rally in the JPY. To summarise, with US treasury intervention and Bessent’s recent remarks that BOJ has to take decisive monetary steps to combat JPY weakness, Sep hike is a done deal for BOJ. What matters now is the forward guidance and the terminal rate discussions. From a flow perspective, prospective GPIF reallocation towards domestic assets could be the game changer for JPY fortune. We remain bullish on JPY and our base case is JPY ending CY26 around 152 levels. Best case could be 145 by end CY26 and worst case around 155 by end CY26. CMP is 156.26
