Nomura Advises Shorting Dollar as Yen Set to Gain 6%

Nomura Holdings, a prominent Japanese investment bank, has advised clients to short the U.S. dollar against the Japanese yen, anticipating that the yen could appreciate by approximately 6% against the dollar over the next few months. This recommendation is driven by the increasing yield on Japanese assets, which is prompting Japanese investors to withdraw from U.S. investments. Additionally, implicit currency pressure from Washington during trade negotiations is expected to further drive the yen's appreciation.

The analysts at Nomura suggest that the dollar-yen exchange rate could drop from its current level of approximately 145 yen to around 136 yen by the end of September. This forecast is supported by the expectation that Japanese investors will repatriate their funds and the U.S. government's pressure on Japan to allow the yen to strengthen. The hawkish stance of the Bank of Japan and the rising domestic yields in Japan are also contributing factors to this anticipated appreciation of the yen.

The increasing yield on Japanese assets is a significant factor in this prediction. As Japanese investors seek higher returns, they are likely to move their investments back to Japan, reducing the demand for U.S. assets and thereby weakening the dollar. This shift in investment strategy is expected to have a notable impact on the currency markets, with the yen gaining strength against the dollar.

The implicit currency pressure from Washington during trade negotiations adds another layer of complexity to the situation. The U.S. government's stance on currency manipulation and its efforts to influence exchange rates could further drive the yen's appreciation. This pressure, combined with the repatriation of funds by Japanese investors, is expected to create a favorable environment for the yen to strengthen against the dollar.

Nomura's recommendation to short the dollar against the yen is a strategic move that reflects the current economic and political landscape. The bank's analysts are confident that the yen will appreciate significantly in the coming months, making it a lucrative opportunity for investors to profit from the currency's strength. This prediction is based on a thorough analysis of the market conditions and the expected impact of various economic and political factors on the currency markets.

In a report to clients, the Nomura team, including Yusuke Miyairi, Yujiro Goto, and Dominic Bunning, noted that the Bank of Japan's gradual tightening of monetary policy will "encourage domestic investors to increase their allocation to domestic bonds rather than foreign bonds." This shift in investment strategy is expected to further support the yen's appreciation against the dollar.

The team also highlighted that if the yen depreciates, especially during sensitive bilateral trade negotiations, concerns about the dollar-yen exchange rate in the U.S. could "intensify." Although analysts do not expect any symbolic currency agreement between the U.S. and Japan, they suggest that the market anticipates a tacit agreement for the dollar to weaken.

In a mid-year report released on Thursday, the U.S. Treasury Department urged the Bank of Japan to continue tightening monetary policy. The department stated that monetary policy tightening would help "normalize the yen's weakness against the dollar" and facilitate the "structural rebalancing urgently needed in bilateral trade."

In early May, the Nomura team withdrew its previous recommendation to short the dollar against the yen, as breakthroughs in trade negotiations led to a sell-off of safe-haven assets like the yen. Despite this, the yen has appreciated by approximately 3.5% against the dollar in the second quarter so far.