USD/JPY forecast: hedge funds are still shorting the Japanese yen

The Japanese yen’s implosion resumed this week as concerns about the country’s economy and interventions continued. The USD/JPY exchange rate has risen for three straight days, moving to a high of 155.17, higher than last week’s low of 151.92.

The Japanese yen is still at risk

The Japanese yen has collapsed hard in over a decade as the Bank of Japan embraced low interest rates and quantitative easing (QE) policies. 

The USD/JPY pair bottomed at 75.45 in 2011 and then surged to a multi-decade high of 160 this month. In the same period, the US dollar index rose from $72 to over $105. 

Unlike other central banks, the BoJ has avoided hiking interest rates in a bid to stir inflation in the country. It only delivered a tiny 0.10% rate increase earlier this year. 

Japan is facing unique challenges. It is the most indebted country in the G7 with a debt-to-GDP ratio of over 261%.

Most of this debt, or about 53%, is held by the BoJ. The BoJ provides this debt by simply printing cash. The rest of the debt is held by the likes of insurance companies, banks, foreigners, and pension funds. 

As a result, the BoJ has avoided raising interest rates because of the impact on the country’s debt servicing regime. As we have seen in the US, higher interest rates leads to more debt servicing costs. The US government is expected to pay over $1 trillion in interest this year.

In Japan, the BoJ has hinted that it will be cautious when it comes to implementing rate hikes, which explains why the yen has plunged. 

The recent surge in the currency happened as the BoJ deployed billions of dollars in the market. In most cases, these measures are usually temporary as we saw in 2022. At the time, the bank spent billions to prop the currency but its downtrend resumed when these measures ended.

A likely hope for the yen is that the Federal Reserve may start cutting interest rates later this year. Besides, recent economic numbers have been weak. Consumer confidence and manufacturing output slumped while the unemployment rate rose to 3.9%.

Meanwhile, hedge funds and other speculators are extremely bearish on the JPY. Data by the CFTC shows that their positioning has been in the negative area since December 2021. The recent CoT report placed the figure at minus 168.4k, close to a multi-decade low of 180k.

CoT report on the JPY

USD/JPY technical analysis

USD/JPY chart by TradingView

The daily chart shows that the USD to JPY exchange rate peaked at 160.26 on April 29th and then tumbled to 151.88. This price action happened as the Japanese government intervened in the market.

As I wrote then, the impact of currency interventions tend to be short-lived, which explains why it has rebounded. The pair made a break and retest pattern since 151.88 was the highest swing in November 2023.

It has remained above all moving averages, which is a sign that bulls are still in control. Therefore, I suspect that the pair will continue rising as buyers target the key resistance point at 160 in the next few months.

This view could be derailed by the actions of the Federal Reserve, which is expected to start cutting interest rates later this year.

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