Yen Summary (Past few months): 

Yen has weakened more than 45% against USD from the Covid crisis low of 102.88, hitting a high of 151.95 in September 2022.  This high was seen once again in November this year.  The rise in USDJPY during the last 3 years has been on the back of rising U.S. interest rates while the Japanese monetary policy has continued with ultra-easy stance and unrelenting quantitative easing by the Bank of Japan.  Though they did tweak their yield curve control policy slightly during this year, the 10-year yield has a difference of 3.7% with the U.S. and the same had a seen widest difference 4.16% last month.    

It is for the above reason that investors have been borrowing in Yen at cheap cost and selling the same against other U.S. and other high yielding currencies for investment (bonds and equities).  They have also invested in some EM countries/currencies like Mexico and Brazil as a CARRY TRADE.  The carry trade position against Yen has been one of the highest in historical terms. 

Recent Updates: 

We have seen the Japanese economy turn around modestly in last six months and their inflation has been in the region of 4% vs. 2% target they have been set to achieve.  Many renowned global investors have been buying Japanese stocks this year due to which the Japanese Nikkei Index has been an outperformer rising nearly 23%.  Even so, the index is more than 10% below the all-time highs that was seen more than three decades ago (in 1989).  There is a perception that Japanese stocks remain one of the most undervalued markets and that has kept the global investors interested. 

Factors Influencing Yen: 

The investor demand for investing in Yen is on the rise for the above reason and the following: 

1. Fall in U.S. yields and the expectation of a rate cut by the FED next year is leading many investors to start unwinding the Yen shorts gradually 
2. With inflation in Japan persisting at 4% consistently, there is increasing pressure on Japanese Central Bank to reverse their easy money policy which they are expected to do in April next year as per market indications.  A change in their policy towards tightness will lead to huge unwinding of short positions and rise in Yen value.   
3. Weak Yen is also increasing the cost of living for Japanese people increasing the political pressure to stop it from further weakness.  The threat of direct intervention to sell Dollars against Yen is leading to more short covering demand. 
4. General Dollar weakness in recent months has led investors to cover their Yen short positions too 
5. Importers in Japan are affected badly due to weak Yen as it affects their import costs which will eventually lead to unviable investment. 

Yen looks fundamentally undervalued and seems overbought against currencies like EURO and GBP and a correction in the same looks imminent. 

Thereby, Yen is expected to strengthen in the coming months, moving towards 138/140 looks likely by the middle of next year if not earlier, while upside is limited to 153 

CONCLUSION: Creating Yen liability at this rate is fraught with two risks –  

1. Strength in Yen that can affect the cost adversely;  

Borrowing/interest cost in Yen can also rise as and when BOJ changes policy