Will the yen sell-off continue after latest BoJ driven sell-off?
The desk anticipates continued weakness in the Japanese yen following its significant underperformance in October, where it was the worst G10 currency. Per the full note from MUFG EMEA, the yen's decline is attributed to the Bank of Japan's (BoJ) recent policy adjustments, which have failed to stabilize the currency amidst rising global interest rates. This sentiment is echoed by the underperformance of the British pound, suggesting a broader trend affecting currencies sensitive to monetary policy shifts.
What the desk is arguing
The yen’s sell-off may persist as market sentiment remains bearish, particularly in light of the BoJ's ongoing dovish stance, which contrasts sharply with expectations for tightening among other G10 central banks. The recent performance has solidified the yen as the worst performer among major currencies this past month, drawing attention to potential further declines.
Moreover, global economic uncertainties and mixed signals from the domestic Japanese economy could exacerbate the yen's plight. As investors recalibrate their portfolios in anticipation of BoE policy adjustments, scrutiny will increase on the yen and its pairing with the pound, both of which have recently faced similar downward trajectories.
Where it sits in our coverage
Our current consensus target for USD/JPY sits at 1.075, reflecting our outlook amid the prevailing market sentiment. This target suggests a moderately bearish view aligning with the overarching trend as the yen continues to struggle against a backdrop of accommodative policy from the BoJ.
Several firms have recently published their targets that highlight varying perspectives on the yen's trajectory:
- JPMorgan: Target at 1.10 for Mar26
- Goldman Sachs: Target at 1.12 for Mar26
- Barclays: Target at 1.04 for Mar26.
How other firms see it
The prevailing sentiment among institutions appears quite mixed, reflecting broader uncertainties. Goldman Sachs and JPMorgan are aligned with a more bearish outlook on the yen, while Bank of America stands in contrast with a more conservative target.
- Goldman Sachs: Bearish stance, target at 1.12
- JPMorgan: Bearish stance, target at 1.10
- Bank of America: Contrarian view, target at 1.04
Overall, the divergence in targets signifies a market grappling with conflicting signals, which could lead to heightened volatility in the forex space.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The yen has emerged as the worst-performing G10 currency, under significant downward pressure.
- 02The BoJ's dovish policy stance is likely to sustain this bearish trend, particularly against a backdrop of tightening by other central banks.
- 03Recent moves in the market are amplifying correlations between the yen and the pound as both navigate their respective challenges.
Market implications
If the yen continues on this trajectory, it could lead to increased volatility in G10 currency pairs, influencing investment flows and impacting exporters dependent on stable exchange rates.
Risks to this view
Risks include abrupt policy shifts by the BoJ or unexpected economic data releases that could alter current market expectations, potentially triggering a sharp correction in the yen's value.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 31st October 2025 and joining Lee to pose some questions on the financial market themes for the week ahead is Jack Greenslade, Deputy Head of UK, Ireland, Swiss and Middle East Corporate Sales. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee, how are you? I'm good Jack, how are you?
Yeah, good. Very good. Another busy week.
I can't believe it's already going to be November now. Feels like the year's flown by. And of course, another very busy week in markets as well.
I guess starting with the long awaited meeting between President Trump and Premier Xi. Both parties able to reach a trade truce in the end. What are the implications for FX markets there?
Yeah, like definitely Jack. I think this is one of the positive developments this week. Like it had been sort of reported ahead of the meeting that it was looking like things were heading for a positive kind of conclusion.
And certainly that looks like that is the case. We have another trade truce this time for a longer period of for another 12 months rather than a kind of 90 day truce that we saw in the past. So that should provide some reassurance and certainty for markets that hopefully we won't see another kind of flare up in terms of trade tensions between the two countries going forward.
Although we can never completely rule out that risk. Additionally, obviously China as well has been able to secure a reduction in terms of tariffs on fentanyl down from 20 percent to 10 percent. In response, China has also agreed to delay the implementation of export controls on rare earth minerals.
So a win there for the US. But overall, I think for markets, we'll see this as a positive development. It reduces kind of downside risks from global trade and should reduce downside risks to global growth.
So from an FX market perspective, I think this is a supportive development for the renminbi and also kind of other Asian currencies which are more tightly linked to the growth of China's economy. And similarly as well, those kind of commodity related currencies which rely on demand from China, such as the Australian dollar should be supported by these developments. Yeah, of course, you mentioned outperformance in Asian currencies.
The one Asian currency that hasn't outperformed being the Japanese yen. I guess that's probably on the back of, you know, the Bank of Japan showing no urgency in hiking rates following their meeting this week. But since then we've had Tokyo CPI inflation sprung to the upside.
We've had urban intervention from Finance Minister Katayama. You know, you would have thought that had been some sort of retracement in the gains we've seen this week. So, you know, what's behind the lack of bearish momentum in Dolly N after these events?
Yeah, like you say, I think we've had a big move higher in Dolly N really this month. I think it's the yen's down by about 7% against the dollar with Dolly N moving back up towards the 1.54 level. So to us, this kind of reflects kind of ongoing kind of optimism that the new government in Japan under Prime Minister Takahashi is still seen as likely to implement kind of bigger fiscal stimulus, which is having a negative impact on the yen.
I guess the BOJ meeting this week as well has kind of played into the view amongst market participants that they'll remain kind of cautious about hiking rates further going forward, potentially coming under some pressure as well from the government there to slow down the pace of tightening. Having said that, though, we still think there's a chance that they could hike rates this year in December. Obviously, if the yen continues to remain weak and if we see Dolly N jumping up towards the kind of high 1.50s, up towards that kind of 1.60 level by the December policy meeting, that yen weakness could put pressure on the BOJ to respond and to bring forward plans to hike rates.
So I think that would be certainly a more effective way to provide support for the yen and to reverse this weakening trend. But in the very near term, I don't think kind of verbal intervention alone will be enough to reverse the yen weakness. Like I say, I think at these kind of levels as well, we're probably still not quite there yet in terms of it's unlikely, I think, that Japan would directly intervene in the FX market and buy the yen at these levels.
I think we need to see Dolly N, like you say, up closer towards that 1.60 level for the market to become a lot more nervous over intervention risk as well. I guess that move higher has been driven by the dollar as well, especially after the Fed's FOMC. So turning to that decision that was released in the midweek, how do you interpret the Fed's more hawkish tone despite the rate cut?
Yeah, I think it's worth it to reflect that there is certainly a bigger divide in terms of thinking on the FOMC about what to do next in terms of policy. Obviously, Chair Powell has had to kind of give some ground and kind of acknowledge some of the more hawkish voices on the Fed who obviously aren't as supportive for the Fed to keep cutting rates. So he's certainly given them a bit more airtime in terms of the guidance where he said it wasn't a foregone conclusion that they'll definitely cut rates in December, which to us that was always kind of the case.
I don't think it was ever a done deal at this stage that they would definitely cut rates in December. And the market was kind of fully pricing in a cut. So we always felt the market probably has gone too far.
And it was always going to be kind of data dependent. At the moment, obviously, the Fed, like everyone else in the market, doesn't have as much clarity as normal in terms of how the economy is performing. We're still making the assumption, though, that if the shutdown ends with enough time before the December FOMC meeting, the Fed gets more information on the labor market.
If we continue to see evidence there that the labor market remains weak, as we have been over the summer period, if that's continued, then we still expect that the Fed will follow through and cut rates in December. So for us, this kind of rebound that we've seen in the dollar, yes, it makes sense because the market's kind of priced out cuts for December. But like I say, if the data basically backs up the case for another cut in December and the Fed cuts rates as we expect, then we just don't see this kind of dollar rebound being sustained.
Yeah, it's quite a challenging job for the FOMC, isn't it, to make these decisions without the data, you know, with the U.S. government entering its fifth week of shutdowns. I guess finally, you know, the next big central bank meeting will be the BOE next week. Sterling continuing to underperform into that meeting.
What are you expecting from the update? Yeah, I think next week is a kind of closer call than we'd originally thought in terms of whether the Bank of England will cut rates or keep rates on hold. Like our base case scenario going into next week is that we still think they'll keep rates on hold next week, given that really since the summer, they've been kind of signaling strongly to markets that they thought there was a stronger case now to slow down the pace of rate cuts.
Admittedly, though, it's pretty clear that over the last couple of weeks, the macro data flow and events here in the U.K. have certainly opened the door again to more rate cuts from the Bank of England. We saw the other week the latest inflation data from the U.K. for September gave us more confidence that inflation is peaking for this year and at a lower level than the Bank of England had been anticipating. I think they would have been certainly pleased that food price inflation dropped more than they had anticipated in September, given that was one of the kind of upside risks they've been highlighting recently.
And then as well, we saw further evidence there that the labour market here in the U.K. remains weak and that wage growth continuing to slow. So things are certainly moving in a more positive direction from an inflation perspective. And then I think finally, the other kind of development that we're kind of still watching closely is the fiscal developments here in the U.K. ahead of the autumn statement.
And certainly the media reports over the past week have kind of reinforced our view that the government will be announcing a kind of more significant package of fiscal tightening measures and of estimates of certainly in the region of say 30 to say 50 billion sterling in terms of fiscal tightening. And with the bulk of that likely to be tax hikes, we do think that will as well be more of a dampener on the growth outlook here in the U.K. going forward. And as we've heard as well from the government here in the U.K., I think this time around, they're obviously a lot more wary about kind of putting in place tax hikes that could kind of worsen the inflation outlook.
So I think this time around, they'll focus more on tax hikes, which have less of an inflationary impact. So all in all, I think the Bank of England would obviously have to take that into consideration. That's why we think they'd probably wait until December to cut rates.
That's kind of been our call for some time. By then, obviously, they'll have more information on what the government's announced in terms of the autumn statement. So that's why we kind of lean more towards December.
But obviously, highlighting that, it wouldn't be a huge surprise if they did cut in November now. I think, like you say, that the data flow and the developments we've seen on the budget have indicated that there is certainly more of an argument for them to just keep cutting rates at the quarterly pace that they've been doing. So we've obviously seen the U.K. rate market move to price in more easing for the Bank of England going forward.
And that's put downward pressure on U.K. yields and the pound over the last couple of weeks. So we see that continuing, even if the Bank of England leaves rates on hold next week. Okay.
And my final question to you, Lee, have you got any trade ideas you're recommending this week? In terms of trade ideas, we're kind of sticking to our long euro sterling trade idea, which is working in our favor. Like you say, we had been anticipating that the market would move to price in more Bank of England rate cuts.
Next week, we think the Bank of England will certainly give off a dovish signal, even if they keep rates on hold. So that should be supportive of our kind of long euro sterling position. Great.
Thanks so much for speaking to me, Lee. Great. Thank you.
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