The dollar to Yen (USD/JPY) exchange rate hit 19-month highs just below the 160.0 level during the second week of January before a retreat to just below 158.0.
JP Morgan notes the possibility of renewed yen selling in the short term and has revised its USD/JPY forecasts higher, but still forecasts a decline to 148 in the second quarter of 2026.
In this context it considers that it is risky in chasing USD/JPY higher in the short term.
The bank considers that the yen will remain vulnerable in the short term with scope for yen selling through carry trades, especially if risk conditions are solid.
Volatility is still relatively contained given the surge in geo-political concerns, but is liable to intensify, especially if domestic bond yields continue to increase.
The bank still sees the potential for a yen rebound over the medium term. The government could decide to intervene through the Bank of Japan to support the Japanese currency.
The yen will also tend to gain support from further geopolitical escalation or US economic deterioration.
In this context, developments surrounding the Greenland affair and other geo-political hotspots will be watched very closely.
