Goldman Sachs has turned more bearish on the Japanese yen, saying that the currency is likely to weaken further against the U.S. dollar and a Japanese market intervention to support the currency will only have a temporary impact. The Wall Street bank raised its forecasts for the dollar-yen exchange rate to 162 in three months, 163 in six months and 165 in 12 months, from its earlier projections of 160, 158 and 155, respectively. That forecast comes as the yen fell to its weakest level against the dollar in four decades last week , keeping Japan’s Ministry of Finance focused on the currency market and investors watching for any intervention to support the currency. “The broader macro backdrop of higher-for-longer U.S. yields, low recession risk, lingering fiscal concerns, and only gradual BoJ hikes strongly argues for continued depreciation pressure on the currency,” according to Goldman. The bank said previous interventions had only temporarily interrupted the yen’s slide before USD/JPY resumed climbing, and expects a similar pattern if authorities intervene again. “In fact, we see no reason for the upward trend in USD/JPY to stop without an unexpected negative US growth shock or a BoJ pivot towards more aggressive policy tightening,” Goldman said. The investment bank also said that Japan’s fiscal stimulus plans could push up domestic bond term premiums relative to U.S. Treasurys, a dynamic that has historically coincided with further gains in USD/JPY. It said intervention may buy time, but without either a U.S. recession or significantly faster Bank of Japan rate hikes, any support for the yen is likely to prove temporary. The revised yen outlook comes as Goldman expects the dollar to stay strong. The bank attributed its conviction to two forces that have underpinned the greenback this year, namely the U.S. artificial intelligence investment boom and energy supply disruptions, and highlighted that these are likely to persist, supporting the dollar against lower-yielding currencies for longer. It said that broad-based dollar weakness was unlikely and revised its euro forecasts lower, projecting EUR/USD at 1.14 in three months before slipping to 1.12 in six months and staying at that over a 12-month period. By contrast, Goldman remained upbeat on several higher-yielding emerging-market currencies. It strengthened its forecasts for the Indian rupee, citing improved growth, lower inflation and expected capital inflows following Reserve Bank of India measures, while also becoming more optimistic on Colombia’s peso after a hawkish central bank and expectations of fiscal consolidation. Reflecting that divergence, Goldman said it continues to favor using the yen “as a funder for high-carry EM expressions,” underscoring its view that investors will continue borrowing in low-yielding currencies to finance positions in higher-yielding markets.
