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Feb 22 - 02:55 PM

ING: JPY's Undervaluation and the Carry Trade Influence

By eFXdata  —  Feb 22 - 01:30 PM


ING's analysis identifies the Japanese Yen (JPY) as significantly undervalued, estimating it to be around 15% below its medium-term fair value. Despite this undervaluation, the yen's performance continues to be negatively impacted by the prevailing carry trade dynamics, with the yen serving as a primary funding currency in 2023. This trend aligns with the general performance pattern in the G10 currencies, where currencies offering higher risk-adjusted carry, such as the Canadian dollar and the British pound, have outperformed. The yen, in contrast, has depreciated by 6% against the dollar year-to-date.

Key Insights:

  • Carry Trade Dynamics: The current market environment, characterized by low volatility and favorable conditions for carry trades, is expected to persist, keeping the JPY under pressure.
  • Valuation and Trade Balance: Despite its weak spot value, the yen's valuation is bolstered by Japan's shifting trade balance. The transition from a JPY 2.5 trillion trade deficit during the 2022 energy shock to a trade surplus supports the currency's fundamental value.
  • Future Outlook: A meaningful recovery in the JPY's value against the USD may hinge on a broader downturn in the dollar's strength, anticipated towards the end of the second quarter. Any further rise in USD/JPY to the 155/160 range would present an opportunity for corporates to adjust their hedging strategies regarding USD receivables and JPY payables.


While the JPY remains significantly undervalued based on ING's fair value models, its performance continues to be influenced by the carry trade, with the yen being a favored funding currency. The change in Japan's trade balance towards a surplus underpins the yen's fundamental valuation, despite its current weakness. Looking ahead, a shift in the broad dollar trend could catalyze a correction in USD/JPY, providing a strategic point for adjustments in corporate hedging activities.

ING Research/Market Commentary


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