MUFG: The JPY - FJElite

The US midterm results are unlikely to alter the US-Japan relationship or Washington’s opposition to further yen weakness. Unless Trump makes an unlikely cabinet reshuffle involving Treasury Secretary Scott Bessent, pressure on Japan to support the currency should persist. However, recent yen gains have been limited despite a sizeable correction in global yields: the two-year Treasury yield has fallen 35bp from its September 29 high, while USD/JPY has risen by around one big figure. This suggests structural capital outflows continue to outweigh the support normally provided by narrowing rate differentials. Finance Minister Katayama has reiterated that Japan would act in line with the US-Japan joint statement.

Two major structural flows are weighing on the yen. First, the expansion of Japan’s NISA tax-free investment allowances has encouraged households to shift savings into overseas equities, with foreign equity purchases reaching ¥3.95tn over the three months to September, equivalent to roughly ¥16tn annually. This trend is likely to persist as inflation erodes the value of cash deposits and strong overseas equity returns attract investment. Second, Japanese companies continue to direct capital abroad through foreign direct investment, reflecting the search for growth in overseas markets amid domestic demographic decline. Net FDI outflows have remained around ¥24tn–¥28tn annually over the past three years, adding another significant structural drag on the currency.

Despite these pressures, the yen may be approaching a turning point. Narrowing rate differentials should eventually provide support, while government measures to encourage more domestic investment and retain capital in Japan could help reverse some of the outflows. Rate spreads remain important, but recent market moves demonstrate that they are no longer a reliable standalone guide to yen performance.