Five reasons you should buy USD/JPY : BofA

Investing.com -- As traders hunt for a contrarian angle, BofA lays out out five fresh reasons why USD/JPY is set for a renewed rally even as consensus lines up on the other side.

1. Bets on hawkish BoJ overdone vs Fed rate-cut bets

The pricing of more than 50% for a Bank of Japan rate hike at the October meeting is at risk "given [Sanae] Takaichi’s victory over the weekend." Sanae Takaichi, seen as a pro-growth and extending ’Abenomics,’ is set to become the Japan’s first female prime minister.

The risk for bets on a Fed rate cut could also be a risk "if concern over the US labor market declines and the government shutdown ends...which would have a bigger impact on USD/JPY than a BoJ hike," BofA said.

2. Cooling inflation could limit BoJ rate hikes

BofA expects Japan’s inflation to fall below 2% year-on-year in 2026 and remain subdued into 2027, complicating the BoJ’s task of justifying hikes. Although BoJ tightening with inflation below 2% is possible, opposition voices could cite undershooting the price stability target. Takaichi, meanwhile, has expressed caution on inflation dynamics, emphasizing government-BoJ policy alignment and likely raising the bar for hikes in the near term.

3. Modest tariff pass-through could benefit USD

Japanese exporters have so far absorbed the cost of U.S. tariffs rather than passing them fully through to prices. This slower pass-through moderates inflationary pressure in the U.S. economy and benefits the dollar at Japanese exporters’ expense, supporting USD/JPY further.

4. US-Japan investment deal could boost demand for USD

The U.S. remains the largest destination for Japanese direct investment, a trend expected to accelerate under the new investment deal. BofA highlights that Japanese government-led funding initiatives and corporate participation may increase capital outflows, lifting dollar demand without direct FX market intervention.

5. Position liquidity a key risk to JPY

Position liquidation risk remains a wild card. While markets often see the yen as a safe haven during stress, BofA notes that the strong short USD/long JPY positioning, though not extreme, could amplify dollar gains if there is a sudden unwind.

With inflation turning more subdued but political change raising uncertainty, BofA keeps a bullish tilt on USD/JPY into year-end, raising its forecast to 155 from 153. The key to the pair’s path remains a delicate balance between BoJ caution and evolving U.S. economic conditions.