Synopsis:

Bank of America maintains a bullish USD/JPY outlook, projecting the pair to rise to 155 by end-2025, citing a mix of domestic political, fiscal, and trade-related risks in Japan. They expect JPY and JGBs to weaken over the summer as structural pressures mount.

Key Points:

• Japan-US Trade Talks Stalled:
  Lack of progress in bilateral trade negotiations reduces the appeal of Japanese assets, potentially delaying BoJ hikes and creating a twist-steepening in the JGB curve.

• Fiscal Concerns Grow:
  Calls for tax cuts from opposition parties and even some ruling coalition members threaten fiscal discipline. With PM Ishiba’s approval ratings under pressure, fiscal expansion may become unavoidable—bearish JPY and JGBs.

• Political Instability Risk:
  Upcoming Upper House elections could lead to leadership changes or a coalition shift, adding policy uncertainty and weakening investor confidence in Japan.

• BoJ Policy Outlook:
  BofA continues to expect no additional BoJ rate hike until April 2026, leaving Japan at the mercy of structural capital outflows and a widening policy divergence with the Fed.

Conclusion:

BofA sees JPY vulnerability building into the summer, driven by political risk, stalled reforms, and widening fiscal concerns. Their base case remains USD/JPY at 155 by year-end, assuming a Fed on hold and no near-term BoJ hikes. Investors should prepare for continued JPY and JGB weakness amid these domestic pressures.