BofA: Why we remain structurally bearish on JPY targeting USD/JPY at 165 by year-end

BofA remains structurally bearish on JPY, raising their USD/JPY forecast to 165 (previously 160) and expecting the 10-year JGB yield to reach 1.65%. They see continued JPY weakness driven by accelerating Japanese outward investment, as households shift wealth away from yen deposits into foreign assets amid persistent inflation.

Key Points:

1️⃣ Higher USD/JPY Forecast 📈

• New target: 165 by year-end (previously 160).
• Consensus remains lower at 148 (Bloomberg median).
• JGB yields forecasted at 1.65% (up from 1.4%).

2️⃣ BoJ Terminal Rate Revised Upwards 🏦

• New BoJ terminal rate forecast: 1.5% (previously 1.0%).
• However, still distant from positive real interest rates.

3️⃣ Accelerating Outward Investment 🌏

• NISA scheme (2024 upgrade) has accelerated household shifts into foreign assets.
• Japanese investors seek protection from rising domestic inflation.
• Toshins (Japanese mutual funds) inflows into foreign assets indicate continued rebalancing away from JPY.

Conclusion:

BofA reinforces its structurally bearish JPY stance, forecasting USD/JPY at 165 by year-end. Japanese households’ portfolio rebalancing and lack of positive real rates will likely drive continued JPY weakness.

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This article was written by Adam Button at www.forexlive.com.