Overview
Goldman Sachs has updated its outlook for the dollar-yen currency pair, raising its projected levels for the coming year. The bank now forecasts USD/JPY at 162 in three months, 163 in six months and 165 in 12 months, compared with its previous projections of 160, 158 and 155 for the same horizons. The revision reflects Goldman’s assessment of several persistent forces weighing on the yen.
Drivers of the forecast change
Goldman attributes the upward revision to a combination of higher-for-longer U.S. yields, a low probability of a U.S. recession, ongoing fiscal concerns in Japan and the Bank of Japan’s gradual approach to rate increases. Together, these factors are judged likely to sustain depreciation pressure on the Japanese currency.
The bank noted that the yen recently slid to its weakest level versus the dollar in 40 years, an outcome that has kept the Ministry of Finance attentive to the exchange rate and apparently prepared to resume JPY-buying operations. Recent reporting, Goldman said, suggests the MoF may issue final warnings ahead of any official intervention to discourage short positions in the currency.
On intervention and its limits
Goldman warned that while intervention can temporarily slow the move, it is unlikely to reverse the fundamental trend driving USD/JPY higher. The firm pointed to the most recent intervention and its rapid reversal pattern - noting that USD/JPY tended to resume an upward trajectory within weeks of those operations. Goldman drew a parallel to the aftermath of April 2024 intervention, saying the pattern implies a similar outcome if additional operations occur soon.
As Goldman put it, "We see no reason for the upward trend in USD/JPY to stop without an unexpected negative US growth shock or a BoJ pivot towards more aggressive policy tightening."
Term premium dynamics and market evidence
The bank highlighted concerns that Japan’s stimulus plans are adding inflationary and fiscal pressure, which should continue to lift the term premium on Japanese government bond yields relative to U.S. Treasury yields. Goldman quantified a relationship observed over the past year: in weeks when Japan’s term premium rose versus the United States, USD/JPY gained about 0.35% on average. When moves in both Japan term premium and the differential exceeded one standard deviation, the pair gained roughly 0.60% on average.
Goldman argued that intervention could "buy time for a potential shift in the macro that then leads to sustained yen appreciation," but cautioned that without such a macro shift the impact of operations tends to be short-lived and diminishes over time.
Outlook and positioning
The bank said it views both a U.S. recession and a faster-than-expected pace of BoJ tightening as unlikely over the coming year. Given that view and the expected persistence of the drivers noted above, Goldman continues to favor using the yen as a funding currency for high-carry emerging market positions, alongside other low-yielding G10 currencies.
Impacted market areas
- Foreign exchange markets, particularly USD/JPY dynamics and carry-trade strategies.
- Government bond markets, through changes in term premium differentials between Japanese government bonds and U.S. Treasuries.
- Emerging market positions that rely on low-yielding funding currencies.