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Investing.com -- Japan’s yen saw a brief uptick on Friday after preliminary second-quarter GDP data came in stronger than expected, lifting prospects of a Bank of Japan rate hike later this year.
However, the currency remains weaker than anticipated, even after yield spreads shifted in its favor, according to Capital Economics.
The yen has held steady against the U.S. dollar since early July despite broader dollar strength.
Analysts note that the U.S. Treasury yields have declined while Japanese government bond yields have stayed largely unchanged, narrowing the U.S.-Japan 10-year yield gap. Under normal conditions, this would have supported the yen.
Confidence in Japan’s investment climate also remains intact. Following the U.S.-Japan trade deal, Japanese equities have outperformed most global markets.
Foreign investors have continued to buy Japanese assets, with net purchases extending into August, data from Japan’s Ministry of Finance show.
At the same time, Japanese investors’ interest in overseas assets has kept cross-border portfolio flows largely balanced.
Capital Economics points out that the usual relationships between the yen, yield differentials, and equity market performance have weakened this year, particularly since “Liberation Day.”
Possible explanations include shifts in foreign exchange hedging behavior, especially among Japanese life insurers, or a risk premium in certain U.S. assets tied to policy uncertainty.
A sharp reversal in the yen’s fortunes could come if the Bank of Japan adopts a more hawkish stance, a scenario made more plausible by recent GDP strength and ongoing price pressures.
Over time, easing trade tensions could also help correct the current market dislocation.
The brokerage’s base case is that the yen will gradually recover against the dollar, with potential for a faster and stronger rebound if market catalysts align.