Japan FX Analysis of USD JPY Price Formation

Citi maintains a bearish outlook for USD/JPY, targeting a decline to below ¥155 by year-end. The pair's resilience despite narrowing interest rate differentials is attributed to strong hedging demand linked to high Japanese equity valuations.

Key Takeaways

• 1.The USDJPY outlook remains bearish for the medium- to long-term, with a target of below ¥155/$ by year-end.
• 2.The current USDJPY price is supported by JPY-sell hedging demand driven by historically high Japanese equity valuations, despite a narrowing interest rate spread.

Table of Contents

• CITI'S TAKE
• Our fundamental view on USDJPY
• Limits to market model
• Basic policy of practical model analysis
• Two-tiered (double decker) model for USDJPY
• Observation of the upper tier (superstructure)
• Observation of lower tier (base structure)
• Internal risks for USDJPY
• Tug-of-war between contraction in interest rate spread and strength of equities