Why USDJPY might see 135 and beyond

The recent depreciation of JPY has attracted much attention, not just from speculators, but also the general public. A friend of mine (who has zero interest in trading and investment) texted me last week and said that he has “bottom-fished” yen to save cost for his next “home visit”. Of course, he is not from Japan. As a millennial grew up in the 80s and 90s, Japanese drama and manga are like the K-pop to the gen-z. We always joke that Japan feels like our second-home for that strange nostalgic feeling every time we visit.

USDJPY had broken 130 level on Apr-28, and made a 20-years high at 131.3 on May-9. Right now (May-20) has retreated back to 127-128 level. Does the recent peak mark the end of JPY weakness? Or is it just another peak to be broken after consolidation? At this point of time the information tends to point to the latter. Below is a summary of what I have been following on the JPY, USD as well as technical side that support the view.

The Weakening JPY

• Depreciation is good for Japan export: If one traces back the history of the Japanese economic boom after WWII, it is highly related to the strong export driven by the competitive FX against the USD as well as other European currencies. It was until the Plaza Accord in 1985 that sharply depreciated USD against its major trading partners including Japan, and in turn led to the bubble burst of the Japanese economy in 1990, followed by 20 years of “lost decade”.
  
  Today, Japanese companies still have the edge (in terms of technology) in many industries such as automobile, consumer electronics as well as equipment (including semiconductor). Weakening Yen is actually good for Japan's exports, at least to gain back some of the loss to China for the past 20 years.
  
  In fact, from the recent speech of Haruhiko Kuroda, the head of BOJ, there seemed to be worry only about the speed but not the direction of depreciation. Depreciation of Yen might somewhat align with what the government wants.
  
  Geo-politically speaking, using Japanese exports to slow down Chinese is also aligned with the interest of the US and their affiliates.
  

• No major inflation since 1990 bubble burst: While inflation has become a major issue across the globe, Japan is one of the economies that haven’t seen major inflation for the past 30 years since the collapse of the Japanese economy in the late 1980s. The inflation rate has been kept below 1% for most of the time. That means the Japanese economy still has a lot of buffer for currency depreciation before imported inflation arises.
  
  

The Strengthening USD

• Change in the fiscal and monetary policy: The post-covid rally in equity, commodity and crypto assets is largely due to the massive expansion of the Fed balance sheet, from pre-covid level of 4 trillion to close to 9 trillion today. The massive money printing on one hand has created wealth across investors in the early phase, however the hike in commodity price has already trickled down to the real economy causing inflation and reduction in purchasing power. To curb the inflation, it is already in the Fed timeline to continue raising interest rates as well as balance sheet reduction. Both action will post appreciation pressure to USD
  

• Narrowing yield spread between the US treasuries and emerging markets bond: The rising yield of treasury bonds (which is also seen as risk free) has reduced the attractiveness of bonds from emerging markets and is already causing money outflow from those countries back to the US. As a matter of fact, the US 10Y treasury yield was already higher than Chinese 10Y government bond, and only retreated back lower slightly together with the dollar. From the risk-return perspective, if the return you get from the Chinese and the US government is the same, where would you “risk” your money?
  

• The safe haven nature of USD: With the rise of geopolitical tension as well as uncertainty in the global economy, money would like to park into safe haven. Months ago people argued crypto assets also have the risk protection nature, but given its high correlation with equity, as well as recent pockets of collapse among stable coins, the confidence has reduced. Money basically flow back to the greenback and gold.
  

Execution: Technical Perspective
The current bullish trend started in early Feb-2022, and went through the Jun-2015 peak without resistance, hinting a very affirmative buying. Consolidation has been seen in the pair for the recent 2 weeks due to over-bought. 125-126 level would be an interesting level to pay attention to for both who want to load up their position to follow the major trend, or placing short position to bet the reversal of the whole weakening JPY narrative.

After challenged the 2015 highest level, there are 2 historical peaks to keep an eye on:

• 135: 2002, post internet bubble burst

• 147: 1998, at the climax of Asian financial crisis and start of Russian financial crisis

However if USDJPY drop below 118, one should exit from long side and be very careful if there are new information supporting the opposite view

Trade closed: target reached:

First target of 134.98 is reached on Jun-13

Recommendation is to do either full profit taking, or leave half of the position to continue bet for further depreciation of yet to second target of 147. However currency market is expected to see great volatility in the latter part with the FOMC rate decision.