Investing.com has fallen sharply over the past four weeks and Citi Research sees the pair as vulnerable to an increase in selling over time.
At 08:55 ET (12:55 GMT), USD/JPY was trading 1.8% higher at ¥146.88, with the pair rising after Bank of Japan officials played down expectations of additional rate hikes earlier Wednesday.
BOJ Deputy Governor Shinichi Uchida said the bank will not raise rates if markets are unstable – comments that follow volatile moves in the Japanese currency.
However, the yen remained well above the 38-year low reached this year, with the pair having fallen sharply over the past four weeks after reaching a high of almost ¥162 last month.
The yen’s weakness was largely due to historically low interest rates in Japan, which fueled the yen’s hugely popular carry trade.
That trade involved borrowing the yen and then using it to buy currencies with better returns. As a result, the yen has been the financing currency of choice for carry trades in US dollars, Mexican pesos, New Zealand dollars and some others.
However, the viability of this trade was called into question when Japanese authorities began to intervene to support their embattled currency, before beginning to fall apart considerably when the Bank of Japan raised interest rates last week.
Japan’s overnight interest rate is just 0.25%, while dollar interest rates are roughly 5.5%, but carry trades are more sensitive to currency movements and interest rate expectations than the actual interest rate level.
“The interest rate spread and risk-reward balance for the carry trade in the JPY do not yet match the conditions that prevailed in the past when the USD/JPY entered a downtrend,” Citi Research analysts said in an August 7 note.
“However, the Japanese government’s intervention to buy the JPY since 2022 has caused a change in underlying supply/demand and may therefore have accelerated the spike for the USD/JPY. In this case, the pair may not return to last month’s high, but instead be vulnerable to an increasing downward range over time.”
The bank expects the USD/JPY pair to fall below ¥140 in 2025, ¥130 in 2026 and ¥120 in 2027.
