Synopsis:

Goldman Sachs has revised its USD/JPY forecasts higher, reflecting the recent tariff detente and risk premium unwind. However, they still expect gradual Yen appreciation driven by increased hedging flows and regional currency dynamics.

Key Points:

• Forecast Revision:
  New USD/JPY path: 142 (3M), 138 (6M), 135 (12M) — revised up from 138, 136, 135, indicating a slower appreciation path.

• Drivers of Yen Strength:

  1. Portfolio Hedging Flows: Japan has been a major unhedged buyer of US assets. Rising hedge ratios could support JPY.

  2. CNY Correlation: Yen often strengthens alongside CNY in risk-on environments. A gradual decline in USD/CNY should weigh on USD/JPY.

  3. BoJ Policy Path: Earlier-than-expected BoJ hikes could lower hedging costs and attract flows back to JPY.

  4. Safe-Haven Appeal: Despite lower recession odds, JPY remains Goldman’s preferred hedge currency.

Conclusion:

Goldman Sachs sees a more gradual path for Yen appreciation, but remains bullish JPY medium-term due to shifting capital flows, regional FX trends, and its enduring role as a hedge asset.