Synopsis:

BNP Paribas has revised its USD/JPY year-end target to 140 (from 135), reflecting tempered expectations for yen strength. However, they still see JPY appreciation over time due to global rotation out of US assets, a comparatively hawkish BoJ, and slowing US growth.

Key Points:

• Forecast Adjustment:
  BNPP now sees USD/JPY at 140 by year-end, up from their previous 135 target, citing more measured yen upside.

• Investor Rotation Theme:
  Japan's large holdings of US Treasuries—especially by life insurers with low FX hedge ratios—could lead to JPY-supportive flows if hedging increases or positions are trimmed.

• BoJ vs Fed:
  The Bank of Japan’s cautious policy normalization contrasts with an increasingly constrained Fed, which could sustain upward pressure on the yen.

• FX Clause Risk:
  While not the base case, BNPP flags that a bilateral US-Japan trade deal including an FX clause could trigger stronger JPY appreciation.

• EUR vs JPY:
  BNPP expects the euro to outperform the yen, driven by stronger flows into European assets over Japanese ones, as JPY assets lack global appeal in current allocation themes.

Conclusion:

BNPP maintains a modestly bullish stance on JPY, though they acknowledge limited repatriation flows so far. The yen may appreciate gradually, but EUR remains their preferred play in a broader dollar diversification strategy.