Insights 
VT 
Nomura predicts a decline in the USD/JPY, anticipating it could drop from 144.92 to 136 by the end of September. The repatriation of funds by Japanese investors and potential pressure from Washington on Tokyo to bolster the yen are contributing factors.
A hawkish stance from the Bank of Japan might lead to increasing local yields. This could prompt domestic investors to favour local bonds over foreign ones.
Mufg Report Prediction
MUFG’s report offers a slightly different estimation, suggesting the USD/JPY could reach 138.30. Both reports indicate a potential shift in exchange rates due to various economic influences.
We’re seeing an alignment from major players that points towards downward pressure on the USD/JPY pair over the medium term, with targets centred around the high 130s. Nomura identifies two key factors behind this projected movement, both rooted in domestic capital behaviour and international diplomatic dynamics.
The first element is the movement of funds by Japanese investors. As interest rate differentials begin to compress, there’s less incentive to hold overseas assets. When those funds return home — typically in the form of selling foreign currencies to convert back into yen — it adds consistent buying interest in the currency. This process does not reverse overnight and tends to build momentum.
Second, and perhaps more forcefully in the short term, is external pressure. The dollar-yen rate creeping closer to long-term highs may become a political rather than just a financial issue. If policymakers in Washington were to vocalise discomfort with excessive dollar strength, that could translate into headwinds for this currency pair. Such scenarios don’t play out quietly.
Meanwhile, the Bank of Japan has been hinting that it may no longer keep monetary policy on auto-pilot. Should yields at home rise even modestly, there’s a renewed case for Japanese institutions to hold more local paper. That’s especially true for pension funds and insurers with long-dated liabilities who seek yield without currency risk.
MUFG has also weighed in with a slightly less bearish figure, but the direction of travel remains the same. The divergence isn’t in the narrative — both houses agree that the yen is undervalued based on domestic shifts and external balance reversion — but in timing and the degree of adjustment.
Market Positioning Adjustments
From our perspective, this confluence of drivers warrants a realignment in positioning. Spot levels near 145 suggest plenty of room for downside. Implied volatilities remain contained, presenting a cost-effective environment for establishing short delta exposure. Moves in the longer-dated JGBs should be watched closely; they may offer early confirmation of capital flows shifting.
It’s not just about spot levels. The forward curve has not fully priced in the extent of the potential adjustment. That gap between current levels and institutional forecasts could widen further if risk aversion picks up or cross-border investment appetite wanes. We would monitor the spreads between local and foreign bonds closely. Cross-currency basis swaps are stabilising, but any widening could foreshadow larger real-money flows.
Options structures can be tailored to take advantage of a softening in the dollar versus the yen. Risk-reversals favour yen strength at current levels, which supports the directional argument. Premiums remain largely balanced, offering a window for layered entries stretching through to end-Q3.
All told, the setup currently leans in favour of rebalancing exposures that leaned too heavily into dollar strength this year. We’re not yet at levels where long yen becomes consensus, but sharp rebounds often begin in precisely such quiet conditions. Keep an eye on short-term yield differentials and any policy commentary that deviates from prior expectations.
The days of sharply one-way trade appear to be narrowing. We’ll be making adjustments accordingly.
