The Japanese Yen Is Ripe for a Snapback

The yen surges amid policy normalization but remains undervalued

Highlights

• The yen surges amid policy normalization but remains undervalued

• Defensive-sectors-led equity rally indicates that not all is well underneath the hood

• Running a huge fiscal deficit will not help the White House with moving Treasury yields lower

• The U.S. corporate delinquency rate is at its highest since 2017

Key Takeaways

• Treasury Volatility Drops Despite Deficit Concerns: Volatility measures in the Treasury market have fallen sharply of late to a near three-year low, and that is highly encouraging (though also rather surprising, especially after reading President Acts Swiftly To Upend World Order on the front page of today’s WSJ). Meanwhile, all the measures being examined in Congress will generate a cumulative deficit surge of $2.8 trillion above already-bloated projections over the coming decade.

• Yen Strengthens as BoJ Tightening Looms: The yen has made a move (+1%) back through ¥150 for the first time since December 2024 as pressures build for the BoJ to renew its policy snugging strategy (with the 10-year JGB yield inching up to 1.43%, the highest it has been since 2009). We have been early and patient with the bullish call on the yen and are sticking with it — the currency should be far closer to ¥120 or ¥130. Swaps markets now price in 85% odds of a Japanese rate hike by July, up from 70% at the start of the month.