EURJPY: TP3 Hit +127 Pips

USD-JPY moved sideways ahead of President Trump and Japan’s Prime
Minister Ishiba’s meeting. The JPY has held on to its gains from yesterday, and
notably, it has been the best performing currency in the G-10 space this week. The
overnight comments by BoJ board member Naoki Tamura also helped, as he flagged
the need for more interest rate hikes (Bloomberg). Some market participants might
believe the recent fall in US yields – on the back of US Treasury Secretary Scott
Bessent’s comments on bringing down US 10-yr yields – could have driven the move
lower in USD-JPY. However, by our estimates using historical elasticities, the
narrower yield differential alone can explain about only half of the JPY’s c2.5% gain
since the BoJ meeting.

For USD-JPY, we think the market’s focus is on two other factors (beyond
yields): (i) US-Japan relations, and (ii) GPIF asset allocation. On the former,
Scott Bessent has already spoken to Japan’s finance minister and the BoJ governor.
President Trump and Prime Minister Ishiba are set to meet later tonight and markets
are on high alert for any potential discussion about USD-JPY (being too high). On the
latter, the GPIF’s next 5-year investment plan will start in April 2025 and markets are
speculating that the GPIF could start divesting from foreign assets to increase its
allocation in domestic bonds. It is worth mentioning that the GPIF has an AUM of
USD1.65tn. Given local investors are under-hedged the downward momentum in
USD-JPY could quickly take a life of its own.