BUZZ-COMMENT- Flows, BOJ keep yen on upward trajectory

Expectations of future Bank of Japan rate hikes and a potential shift in Japanese portfolios as JGB yields rise could leave USD/JPY sellers in control.

Remarks by BOJ hawk Naoki Tamura on Thursday suggest the tightening cycle still has room to run, even if Japan's economic data begins to soften. Additionally, the portfolio rebalancing trend seems to be taking shape, with the latest Ministry of Finance report showing Japanese investors selling the most foreign bonds since early November.

Given the nature of these flows, the pace of yen appreciation is likely to be slow. The days of a yen surge driven by carry unwind are over, replaced by a gradual build-up of long positions. This trend is clearly reflected in the weekly CFTC data, where USD/JPY losses are increasingly tied to the accumulation of yen longs.

As a result of this yen buying, USD/JPY has retraced much of its rise from 139.58 to 158.89 between September and January, providing some reassurance to Japanese authorities. The pair is currently resting atop its weekly Ichimoku cloud at 151.81 before reaching a 38.2% Fibonacci retracement level at 151.51.

One risk for yen buyers is that inflation outside Japan could rise if tariffs are implemented. This may support the dollar, although the yen may see haven demand if equities fall or U.S. stagflation concerns grow. The upcoming employment report on Friday will be closely watched to see if the stagflation scenario is starting to take shape.

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