Societe Generale analysts argue that the Japanese Yen remains significantly undervalued versus the Dollar on a purchasing power parity basis, with USD/JPY far above fair value near 95. They highlight persistent carry trade positioning, repeated FX interventions near 160, and a surging Nikkei as signs that Japan’s economy may be improving and that complacent short-Yen positions could be vulnerable if authorities guide USD/JPY lower toward 150.

Undervalued yen and fragile carry trades

“The current USD/JPY level is ludicrously out of line with purchasing power parity (PPP), which is around 95.”

“So far, it is retaining its familiar role as a “carry currency”, as the rate differential relative to other central banks makes for an attractive carry trade, even if it is smaller than it used to be.”

“The last two spikes in USD/JPY towards 160 were repelled by FX intervention, but only temporarily.”

“But the Nikkei may be telling us that Japan’s economy is on the verge of improvement, and there are lazy yen short positions in the market.”

“The BoJ [Bank of Japan] and MoF [Ministry of Finance] may decide to help USD/JPY fall, but to 150 rather than the 140 level we have seen in previous corrections.”

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