Japan's Balance of Payments Stabilizing ⚖️

Bank of America notes that Japan's basic balance of payments (BoP) seems to be stabilizing and balanced. Factors contributing to this include the country's adjustment to lower oil prices, a rebound in inbound tourism, and a plateauing income surplus. Despite a slowing US economy, Japan's outward foreign direct investment (FDI) remains strong, implying this trend might continue for the time being.

A Tug of War Between US Recession Risk and Yen-Carry Trade 🥊

The balance of demand/supply for the yen might be influenced by the perceived risk of a US recession and yen-carry trade. If the US were to enter a recession, it could negatively impact the commodity market and dampen Japan Inc.’s risk appetite and outward FDI, leading to a BoP surplus. However, in the absence of imminent US recession risk, FX carry in G10/JPY could remain high, attracting yen-carry trade. BofA's base case is that yen carry trade might weigh over JPY before US recession risk becomes more pronounced.