Goldman Sachs' Fishman on Yen - FJElite
BOTTOM LINE: Japan's largest FX intervention in 15 years forced a sharp reduction in tactical Yen carry positions— even bigger than the initial unwind after the July 2024 operations. But the less Yen-positive macro backdrop likely in part explains why USD/JPY has already reversed nearly half of its initial decline.
Positioning: Despite the significant drop in speculative positioning, more unwinds can follow if the right conditions align. Positioning could even flip net long if the macro and market backdrop argues for a stronger Yen, as it did in July-August 2024. Recession risk is much lower today than in the summer of 2024, and a bullish shift in JPY sentiment often requires the emergence of growth concerns. But markets now view a September Bank of Japan hike as roughly 75% likely, and a faster pace of hikes could keep the Yen stronger for longer without a shift in the global growth backdrop.
Repatriation: Japanese investor repatriation of unhedged foreign assets would be the true structural carry unwind. Reports that the Japanese government wants to encourage pension funds and retail investors to shift back towards domestic assets have raised the prospect of such flows, but return prospects abroad still look more attractive and there are no signs yet of rotation in the official portfolio flow data.
Headwinds: If none of the catalysts for Yen strength materialize, the impact of the intervention should further diminish. That could clear the path for the Yen to weaken to fresh lows—just as it did in the aftermath of the April— May intervention earlier this year. The steady climb in USD/JPY since the intervention reflects the underlying depreciation pressures and the lingering skepticism that the domestic policy mix or broader macro backdrop can shift enough to sustainably support the Yen. Additional interventions can continue to buy time and wash out speculative positioning, but only for so long.
