JPY_1_M

The yen: what drives further weakness versus a reversal.

Forex 4 minutes to read
Picture of John Hardy
John J. Hardy

Global Head of Macro Strategy

Summary:  The Japanese yen sell-off extended aggressively, forcing an assessment of the logic driving it and the forces, if any, that could stop it.


Thinking through JPY drivers after getting banged over the head by JPY weakness.
The JPY sell-off followed through with surprising vigor, almost on a scale that suggests some see parallels with the arrival of Abe back in late 2012, who promised a sweeping new “three arrows” Abenomics agenda of monetary easing and fiscal reforms. But what a world of difference between the disinflationary zero-rates world backdrop of the time, with USDJPY at below 80. Compare that to the present day, when monetary policy tightening is on the agenda and we have a 50% devaluation in the JPY versus the US dollar. Meanwhile, the number one concern of Japanese voters is inflation and getting it under control.

If we recall back to the policy mix that was actually delivered by Abenomics, it was chiefly a sales tax hike on the fiscal side that came in 2014, while the real radical, big fat single “arrow” was a radical monetary easing, putting “Kuroda-nomics” (Kuroda was BoJ governor) in the driver’s seat. Around the same time – until well into 2014, the euro was uncomfortably strong because the ECB had yet to do proper QE, while US long treasury yields were all over the map – supporting the massive re-rating higher in USDJPY in 2013 as they spiked on the ”taper tantrum” of May-June before easing lower later.

So what now? At these levels, JPY sellers are anticipating that the Japan will continue to pursue financial repression and even yield-curve-control to prevent bond yields from pushing anywhere near the inflation level at the front end of the curve and perhaps out to 10-years. Meanwhile, Takaichi is seen pursuing a more fiscally aggressive policy, driven more by encouraging investment and targeted tax cuts than new spending. It’s a supply-side agenda that would normally be currency positive if it wasn’t for the concerns of fiscal stability and/or the monetary policy mix and significant carry differential between the JPY and other major currencies.

Taking the Occam’s razor approach here: the JPY weakening is helped along by carry trading as the market is encouraged to believe that a Takaichi government will encourage a strong boost to the economy and Japanese industry and Japanese stocks. At the same time, the BoJ and MoF will ensure that bond yields are kept low – encouraging inbound investment into Japanese stocks, flows that are cheap to hedge because of the low-yielding JPY.

This is a far more benign interpretation than the risk of some “Liz Truss moment” driven by concerns that Japan’s fiscal stability in question and must be transferred to the currency if the BoJ and MoF strong-arm the JGB market to suppress yields. What makes the JPY go stronger, then? First, there is the risk that Takaichi can only piece together a weak coalition that fails to deliver a more powerful policy response. But the only real sustained strong JPY scenario might require both deflation in global risk assets and a rally in global bond markets.

Chart: USDJPY
USDJPY tested marginal new highs above 153.00 after the strong momentum break above 150.00 and 151.00. It’s unwise to stand in front of an onrushing train, so let’s see how this one plays out – key to get the first policy signals and measure the level of concern this is likely already generating within the Ministry of Finance and at the Bank of Japan. Little to guide us on technical besides round numbers like 155.00, with some two-way volatility seemingly inevitable once officialdom weighs in.

09_10_2025_USDJPY
Source: Saxo

Looking ahead – USD and French government status, please

The US dollar looks like it is mostly a function of the massive move higher in USDJPY as the greenback has generally failed to follow through much higher after breaking key levels like the 1.1650 area in EURUSD and GBPUSD has yet to break the key range low near 1.3325. AUDUSD is simply sideways as commodities prices support and China is back from holiday today with a strong CNH fix. USD bulls still have a technical case here – but need to see follow through outside of USDJPY to suggest a larger consolidation remains afoot – next focus in EURUSD at 1.1575, for example. The JPY is the main market motor here, not the US dollar.

France may be set to dodge a near term bullet as the freshly resigned PM Lecornu and Macron are attempting a last ditch effort to put together a new government that will get the critical mass of support by rolling back some or all of the pension reforms that started going into effect in 2023 and were aimed at slowly cranking up the retirement age from 62 to 64. If France was an independent country, it would long ago have found itself embroiled in a fiscal and/or currency crisis, but German and other EU savers continue to allow the country to extend and pretend. France-Germany 10-year spreads this morning are a few basis points lower from the cycle highs this week – still worth watching, but as long as globally long yields are tame elsewhere, this issue may be set to get kicked down the road – but certain to return.

FX Board of G10 and CNH trend evolution and strength.
Unable to update the FX Board today due to technical issues - apologies for the inconvenience!

This content is marketing material and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results.
The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..

Quarterly Outlook

01 /

  • Q4 Outlook for Investors: Diversify like it’s 2025 – don’t fall for déjà vu

    Quarterly Outlook

    Q4 Outlook for Investors: Diversify like it’s 2025 – don’t fall for déjà vu

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Q4 Outlook for Traders: The Fed is back in easing mode. Is this time different?

    Quarterly Outlook

    Q4 Outlook for Traders: The Fed is back in easing mode. Is this time different?

    John J. Hardy

    Global Head of Macro Strategy

    The Fed launched a new easing cycle in late Q3. Will this cycle now play out like 2000 or 2007?
  • Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally

    Quarterly Outlook

    Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Q3 Macro Outlook: Less chaos, and hopefully a bit more clarity

    Quarterly Outlook

    Q3 Macro Outlook: Less chaos, and hopefully a bit more clarity

    John J. Hardy

    Global Head of Macro Strategy

    After the chaos of Q2, the quarter ahead should get a bit more clarity on how Trump 2.0 is impacting...
  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.