“Historically undervalued” remains hard to say has reached a bottom, as Goldman Sachs cuts its yen target price to 165.

As global foreign exchange markets resume trading amid U.S.-Japan monetary policy divergence, Goldman Sachs further turns bearish on the yen.

On July 6, Kamakshya Trivedi, Goldman Sachs' global head of foreign exchange and interest rates, stated that the bank has sharply raised its 12-month USD/JPY forecast from 155 to 165, and said that the yen's current valuation is at a "historically undervalued" level. This implies that Goldman Sachs believes the yen's current weakness is not due to short-term market sentiment but is driven by fundamentals, leaving room for further depreciation over the next year.

This assessment reflects Goldman Sachs' latest view on the direction of U.S. and Japanese monetary policy: the pace of Fed rate cuts will be slower than previously expected by the market, while the Bank of Japan's policy normalization is unlikely to quickly narrow the interest rate differential between the two countries. Against this backdrop, market expectations for a trend reversal in the yen may need to be recalibrated.

The U.S.-Japan interest rate differential remains the core variable determining exchange rate trends

The core logic behind Goldman Sachs' sharp upward revision of the USD/JPY forecast remains the continued divergence in U.S. and Japanese monetary policy.

On the U.S. side, Goldman Sachs' recent macro view suggests that under the influence of the hawkish stance of the new Fed Chair Walsh and persistent inflation, the Fed's rate-cutting path has been pushed further out, with the last two cuts potentially delayed until 2027. This means U.S. interest rates will remain elevated for a longer period, providing sustained support for the dollar.

In contrast, while the Bank of Japan has already ended negative interest rates and is advancing monetary policy normalization, the pace of rate hikes remains cautious, and Japan's interest rate rise is difficult to keep up with the U.S. As long as the U.S.-Japan interest rate differential remains high, carry trades based on the differential will remain attractive, making it hard for the yen to escape structural pressure.

Tactical allocation value remains, but long-term weakness is hard to change

Notably, although Goldman Sachs has lowered its medium- to long-term yen exchange rate forecast, it still recommends allocating to the yen in its latest cross-asset allocation.

The reason is that the yen still retains its traditional safe-haven currency attributes. When the global economy faces growth shocks, geopolitical risks escalate, or market risk appetite rapidly declines, the yen usually benefits from safe-haven capital inflows, playing a defensive role alongside gold and the dollar.

However, Goldman Sachs believes that such safe-haven demand is more of a phased trading opportunity and is insufficient to change the medium- to long-term exchange rate trend determined by the interest rate differential. Under normal macroeconomic conditions, as long as the U.S.-Japan interest rate differential remains high, any yen rebound is more likely to be a short-term correction rather than a trend reversal.

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        Markets are risky, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at your own risk.