The US Dollar to Yen (USD/JPY) exchange rate is trading around 161.70 after reaching a July high above 162.80, leaving the Japanese currency close to multi-decade lows.
Crédit Agricole believes the risks remain tilted towards further USD/JPY gains, with the median outcome from its scenario analysis at 170.45.
The bank’s current model estimate places short-term fair value near 161.75, suggesting that intervention by Japanese authorities around present levels would be “fighting the fundamentals”.
Crédit Agricole tested a range of scenarios covering Federal Reserve and Bank of Japan policy, Japan’s fiscal outlook and the future of the US-Iran conflict.
Even its more favourable scenario for the Yen—both central banks staying on hold, a peace settlement and easing Japanese fiscal concerns—produces a USD/JPY fair-value estimate near 163.50.
A renewed closure of the Strait of Hormuz could push fair value towards 171. Higher energy prices would potentially force the Fed to raise rates while encouraging the BoJ to remain cautious because of the threat to Japanese growth.
The most severe fiscal scenario places USD/JPY near 174.60, reflecting fears over Japan’s debt position and concerns that the BoJ is falling behind the inflation curve.
According to the bank, “the path for USD/JPY is higher unless the structural weaknesses in the JPY are addressed.”
These weaknesses include loose monetary policy, a steepening Japanese government bond curve and the continued investment of Japan’s current-account surpluses into overseas assets.
Crédit Agricole describes the 162-164 region as a key battleground for Japanese authorities. A sustained move above this zone would take USD/JPY beyond its post-Plaza Accord trading range and could increase pressure for another round of intervention.
