Goldman slashes yen forecast to 150 as BOJ hawkish shift weighs

Cutting the 12-month target by 15 yen from a major desk is significant. Yen bulls now have support as USD/JPY approaches 160. The main market risk lies in carry trades; if Japanese capital returns home, yen-funded positions in higher-yielding assets may unwind rapidly. Goldman's preference for selling EUR/JPY over USD/JPY indicates it acknowledges the near-term dollar support from elevated US yields.

Australian traders see a dual drag on AUD/JPY from yen strength and the BOJ reducing the rate differential with the RBA. New intervention by Japan would be the quickest path to Goldman's revised levels.

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Earlier:

• Daiwa forecasts next BOJ rate increase in December as Ueda signals policy change

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Back in July, Goldman argued that only a more hawkish BOJ could halt the yen's decline. Now with the BOJ taking a tougher stance, Goldman has lowered its USD/JPY forecasts and repositioned the yen as a recession hedge.

• Goldman Sachs trimmed its USD/JPY projections to 158 for three months, 155 for six months and 150 for a year, down from 162, 163 and 165.
• Faster policy tightening by the BOJ is expected to counter the inflationary push from Japan's expansionary fiscal measures.
• Goldman sees increased probability of Japanese investors repatriating capital, though this remains mostly hypothetical.
• It views long yen positions as particularly valuable as a safeguard against recession risks.
• Further intervention threats are likely to limit dollar appreciation against the yen.
• On a tactical level, Goldman recommends selling the euro versus the yen.

According to Sina Finance, Goldman Sachs has lowered its USD/JPY forecasts across all timeframes. The bank contends that a more favorable policy environment in Japan and the potential for capital repatriation bolster the yen's appeal. Strategist Karen Reichgott Fishman now projects the pair at 158 over three months, 155 over six months and 150 over 12 months, reduced from prior estimates of 162, 163 and 165.

This revision represents a sharp turnaround. As recently as July, Goldman had upgraded these projections and was one of the most bearish on the yen. It pointed to sustained high US yields, minimal US recession risk, Japanese fiscal worries and staggered BOJ tightening. Then, Goldman stated that the dollar's advance against the yen would likely continue unless the US experienced a growth shock or the BOJ became more hawkish.

The second condition has materialized. The BOJ increased its policy rate to 1.25% this month, and Governor Kazuo Ueda announced a change in policy phase, now prioritizing 2% inflation stability over further increases. Fishman contends that quicker BOJ rate hikes counteract the inflationary influence of expansionary fiscal policy. They also increase the likelihood of Japanese investors reallocating portfolios to domestic assets.

Goldman concedes that the repatriation narrative is still mostly speculative, but it sees growing chances, adding downward pressure on USD/JPY. Fishman noted that collectively, these factors make long yen positions more attractive and especially effective as a hedge against recession risk.

The bank also believes that the risk of additional intervention from Japanese authorities will constrain the dollar's rise versus the yen. Tokyo has intervened in the market already this year, and the US Treasury has also purchased yen as part of efforts to manage climbing borrowing costs.

In the near term, though, Goldman maintains a cautious tactical approach. Instead of taking a direct short on the dollar, its favored trade is to short the euro against the yen. This position gains from yen appreciation without depending on a shift in US yields.

The updated projections go against a market that has been trending in the opposite direction. USD/JPY has been advancing toward 160, buoyed by US 10-year yields exceeding 5.2%. Goldman's three-month forecast suggests only a slight retreat from that level. The more substantial changes are at the six and 12-month marks, where Goldman anticipates the impact of BOJ tightening and capital flows to accumulate.