Are fundamental drivers falling into place for a stronger JPY?
The desk posits that the recent rebound in the Japanese yen is driven by fundamental factors rather than intervention, suggesting a potentially more sustainable strength moving forward. Per the full note from MUFG, the yen strengthened significantly, with USD/JPY dropping from around 160 to closer to 155, indicating a pivotal shift. This movement coincides with reports from the Bank of Japan (BoJ) showing stable current account data, reinforcing that the yen’s appreciation may continue. As sentiment builds around this fundamental shift, institutional traders should monitor the critical 155 support level closely, as its breach could signal further upside for the yen, particularly in light of the current macroeconomic landscape.
What the desk is arguing
The desk believes that the yen's recent strength is indicative of a fundamental shift in market dynamics rather than a temporary effect from central bank policies. This perspective is underscored by MUFG analysts noting that recent gains in the yen have not been traced back to intervention practices, which have characterized prior reversals.
One of the crucial factors highlighted is the 155 support level, which has historically held firm in the face of interventions. Analysts suggest that the sustained strength around this threshold not only reflects an increasing bullish sentiment towards the yen but also implies that a solid fundamental foundation is backing this move, setting the stage for further advances in the coming weeks.
Where it sits in our coverage
As of our last reporting, consensus targets for USD/JPY among key analysts are averaging around 1.075, with a range spanning from 1.04 to 1.12. Notable firms with forecasts include: - jpmorgan: target at 1.10 (Mar26) - bofa: target at 1.04 (Mar26)
This outlook suggests that the desk's view aligns with the higher end of the consensus, indicating an optimistic stance on the yen's trajectory compared to an overarching range that anticipates minor fluctuations.
How other firms see it
While firms such as jpmorgan are aligned with our positive outlook on the yen, firms like bofa hold a contrarian position, indicating potential caution around future yen strength. The market sentiment surrounding these predictions highlights a divided view on the sustainability of the yen's recent gains, with varying expectations for intervention from the BoJ impacting broader market dynamics.
Given the implications of these forecasts, key pairs to watch include USD/JPY for immediate volatility and EUR/JPY as it interlinks with the European Central Bank's policy decisions that could also affect yen valuation.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The yen's recent strength signals a fundamental market shift, potentially sustainable.
- 02USD/JPY moved significantly from 160 to 155 with a focus on the 155 support level.
- 03This move is not associated with BoJ intervention, marking a change in trend.
- 04Broader sentiment remains divided among major financial institutions on the yen's trajectory.
Market implications
Traders should closely observe the 155 support level for USD/JPY as a potential key pivot point. Given the differing views among institutions, any movement below this support could prompt a reassessment of bullish positions, while a hold could reinforce the yen's ascent.
Risks to this view
A reversal in the yen's recent gains could occur if the BoJ intervenes or indicates a shift back to a more aggressive ease of monetary policy. Additionally, any significant geopolitical developments or weaker-than-expected economic data from Japan may also undermine the strengthening yen narrative.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst. It's Friday, 4th September 2026, and joining Lee to pose some questions on the financial market themes for the week ahead is Henry Cook, Senior Economist. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only, and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi, Henry.
Hi, Lee. Yeah, it's good to see you on the podcast again today. In the FX market, we've had an interesting week.
We've seen the yen strengthening sharply over the last two or three days, and that's seen dollar yen drop from around the 160 level closer to the 155 level. This time around, the yen strength does not appear to be driven by intervention, looking at the latest BOJ current account data. So I definitely think this is a change from what we've seen recently.
Yeah, it's been a busy week in markets, hasn't it? I mean, what do you think has been the main driver on this occasion of yen strength? Is it likely to extend?
Yeah, like I said before, I think this time around, the strong yen doesn't look like it's been kind of driven by intervention. So it looks to be more of a kind of fundamental driven move, which is something which we haven't seen for some time. And it definitely kind of raised the likelihood that this could be something kind of more sustainable, and that the yen could continue to strengthen further going forward.
In terms of kind of key support levels that we're watching, I think that kind of 155 level is very important. And that has been a very strong support level so far this year. On the two occasions when we did see the intervention driven gains for the yen, that 155 level did hold.
So I think it would be certainly a bearish development for dollar yen if we were to break through that 155 level and to open up the potential for a bigger move to the downside going forward. And when we kind of look at what's been kind of changing from a fundamental point of view, we've kind of highlighted a couple of factors like on the Japan side, definitely true that market participants are becoming kind of more confident that we're going to see a faster pace of BOJ rate hike. Earlier this week, we had more hawkish comments from BOJ officials, including Governor Ueda, indicating that they are planning to hike rate again this month by 25 basis points and ourselves here at MEFG think that the BOJ can still do at least another three hikes by the middle of next year, which would definitely, if that is delivered, would start to put more upward pressure on the yen and to narrow that yield differential with the US.
We've also seen kind of renewed speculation as well this week about the potential for the GPIF government pension fund in Japan to consider allocating more of their assets towards domestic rather than foreign assets. While obviously at this stage, we don't have any definitive kind of plans in place to do that, there is definitely more speculation that that is a potential change we could see going forward. It has been reported that the GPIF management committee held an unusual meeting on the 21st of August and potential changes to asset allocations could have been discussed at that meeting.
So that's definitely given the market the belief that things could change. And then finally, we also have to take into consideration as well what's been happening on the US side of things over the past week. And what we've seen is that we've had certainly dovish comments from some of the kind of more kind of key leadership figures from the Fed.
New York Fed President Williams and Fed Governor Waller both indicated that as long as the CPI report next week on Friday, as long as that US CPI report remains relatively soft, they feel that they could still vote to keep rates on hold this month. So that has put more downward pressure on US yields and led to a weakening of the dollar more broadly as well. Talking about the outlook for Fed policy, I think definitely next week, the focus will shift back towards Europe.
We have the ECB meeting in the week ahead. It'd be interesting to hear your thoughts, Henry, in terms of what are you expecting from the ECB's latest policy update? Yeah, it's going to be a busy month for central bank meetings, isn't it?
I think in terms of the ECB, they are clearly set to raise rates next week. It's fully priced by market participants. We've had a range of comments from governing council officials kind of endorsing it.
This week, we saw the August inflation number for the eurozone print at 3.3%, which was the highest figure in almost three years. That's kind of cemented the rate hike if there were any kind of lingering doubts. And we've also had that recent uptick in energy prices, especially gas prices.
So yeah, it does seem like a done deal. I think the question is what comes next. In terms of guidance, I think we can basically expect unchanged kind of messaging from the ECB.
They'll take a meeting by meeting approach. They'll take a data dependent approach. And yeah, there will be a kind of vigilant tone, I think, given that energy market backdrop.
Do you think, Henry, that this would be the last rate hike from the ECB? Well, I mean, the door will be left open, I think, to further hikes if required. But I think ultimately, the ECB is likely to remain non-committal, which is the tone we heard back at the last meeting in July.
A hike in September, that would take the deposit rate to 2.5%, which is the upper end of the ECB's estimated range of the neutral rate. And so it kind of, as I see it, it kind of completes the first phase of the ECB's response to the energy shock. They've recalibrated a bit, they're better positioned now, if we do see signs of broadening inflation pressures.
But ultimately, as I see it, there is very little evidence of second round effects on inflation. The data just is not there to justify pushing on further into restrictive territory. The August inflation release I mentioned, actually, that showed core inflation coming in a little bit softer.
The services component eased more notably. Survey data looks pretty benign. Wage growth indicators are basically target consistent.
So, yeah, our call remains that after this hike in September, the ECB will remain on hold. We do acknowledge that risks are tilted towards another hike by year end, given the current energy market situation, gas prices in particular, and market pricing around the ECB does reflect that. The sort of resilient growth situation in Europe as well, that also bolsters the hawkish argument.
So, yeah, we could see signs of more fragmented views coming out of the governing council. But yeah, as it stands, we don't think the ECB will see it necessary to go further in response to kind of what remains a textbook supply side shock, really, that there's little sign of any domestically generated inflation pressures in the eurozone as it stands. Yeah, and we had a look at the European rate market pricing ahead of next week's ECB meeting.
And it's fair to say definitely over the summer, the European rate market has moved to price in a more hawkish path for future ECB action. The market is pretty much fully priced now for a hike next week and also an additional hike by the end of this year. So, from that perspective, we do think there's certainly a higher kind of hurdle now for the ECB to provide a hawkish surprise.
If anything, we think the risks are probably more tilted now more towards the downside for European yields. If President Lagarde next week in the press conference doesn't give a strong signal that they're already considering hiking at the end of this year, that could disappoint some of the pricing that's in the market. And if that was the case, we could see some modest euro weakness after next week's ECB meeting.
Yeah, as hikes go, I think it will be on the dovish side of things. But in that way, I think the ECB will be noncommittal about the outlook for further rate hikes. Great, great insights, Henry.
And that brings an end to this week's podcast. Thanks, everyone, for listening and have a good week ahead. This has been a Global Markets podcast.
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