Synopsis:

MUFG discusses the recent surge in the yen, attributing it to various factors, including the Bank of Japan's (BoJ) decision, global growth concerns, and a shift in market dynamics. The bank also emphasizes the correlation between risk-off sentiment and yen strength, highlighting the potential implications for USD/JPY.

Key Points:

1. Yen Surge:

   • Factors: The yen's strength is due to multiple factors aligning, including the BoJ's recent policy decisions, increased global growth concerns, and falling commodity prices.
   • Trend Reversal: MUFG argues that this may be the most compelling moment since the USD/JPY bull run began in March 2022 to suggest that the trend of yen depreciation might be over.

2. Market Dynamics:

   • Risk-Off Correlation: There is a re-emergence of the correlation between risk-off sentiment and yen strength, driven by the plunge in US yields.
   • Carry Unwind: The weakening of the USD and falling commodity prices have led to an unwinding of carry trades, contributing to yen appreciation.

3. Leveraged Funds and Positioning:

   • Reduction in Short Yen Positions: Leveraged funds have aggressively liquidated short yen positions, marking the largest two-week reduction since 2011.
   • BIS Data: The Bank for International Settlements (BIS) cross-border lending data indicates a significant increase in JPY liabilities as a foreign currency, pointing to the largest amount since the run-up to the Global Financial Crisis (GFC).

4. Equity Market Impact:

   • Japanese Equities: The plunge in Japanese equities may create a self-fulfilling cycle where yen strength fuels equity selling, which in turn fuels further yen buying due to foreign investors being over-hedged on the falling value of their equity positions.

5. Global Developments:

   • US Yields: The most critical variable for USD/JPY remains US yields rather than Japanese yields. Assuming no hard landing materializes in the US, MUFG does not expect USD/JPY to continue plunging.

Conclusion:

The recent surge in the yen reflects a combination of domestic policy changes by the BoJ and broader global economic concerns. While there is a significant unwinding of short yen positions and an emerging correlation between risk-off sentiment and yen strength, the future trajectory of USD/JPY will largely depend on US economic conditions and yield movements. Assuming stable US economic conditions, the yen may not continue its rapid appreciation.