The Yen Paradox: Currency Weakens Despite Yield Spike and Political Stability

In a classic “sell the fact” reaction to political certainty, the Japanese Yen remains under intense pressure despite the LDP securing a historic two-thirds supermajority under Prime Minister Sanae Takaichi.

Traditionally, a stable government and rising domestic yields would support the home currency. However, a decoupling phenomenon—highlighted by recent Morgan Stanley analysis—is governing the current price action: JGB yields are rising, but the Yen is falling.

The Breakdown of the “Repatriation” Myth

The market's assumption that higher Japanese rates would trigger a massive repatriation of funds by Japanese lifers and pension funds appears to be flawed, as evidenced by current institutional behaviors.

• Investment Trusts: Continue to bid aggressively for overseas assets to hedge against inflation and currency debasement.
• Institutional Flows: Data shows Japanese banks and insurers maintain bifurcated balance sheets, with no significant liquidation of foreign bonds to buy JGBs.

Speculators and the 'Carry' Resurrection

The Yen is currently functioning as the funding currency of choice for the revived global carry trade. With the US economy showing resilience, the interest rate differential remains wide enough to justify short-JPY positions.

Morgan Stanley warns that the Yen is pricing in a “Fiscal Risk Premium.” The Takaichi administration is expected to pursue aggressive fiscal expansion. This inflationary outlook drives yields up but hurts the currency due to debt sustainability concerns.

Risks to the Downside

While the current trend is bearish for the Yen, the leverage is heavily skewed. Speculative short interest is high in London and New York trading hours. A sudden unwinding—triggered by a US recession signal or intervention—could see USD/JPY snap back toward the 145.00 fair value model estimate. For now, the market is betting the BoJ remains behind the curve.

Market Data & Stats

• Fair Value Model: 145.00
• Key Pair: USD/JPY
• Central Bank: BoJ