Goldman Sachs said in a report released on Sept. 10 that the Japanese yen has appreciated by more than 4% since the start of September. The bank said a more hawkish turn by the Bank of Japan, together with market expectations that Japan’s Government Pension Investment Fund, or GPIF, could adjust its asset allocation, is pushing foreign-exchange markets to reassess the yen’s medium-term outlook.
According to Goldman, the yen could enter a phase of structural appreciation if GPIF shifts part of its assets away from overseas holdings and into Japan’s domestic fixed-income market.
A 5-point shift could imply about $100 billion in USD/JPY selling
Based on GPIF’s roughly $2 trillion in assets under management, Goldman estimated that raising domestic fixed-income allocation by 5 percentage points would theoretically amount to about $100 billion of USD/JPY selling. The report said that figure is roughly equal to half of Japan’s annual current account surplus. It could also prompt an unwind in previously accumulated yen-funded carry trades.
Goldman said the impact would not be confined to Japan and could spill over into other Asian currencies.
Goldman says the won is the most sensitive to yen moves
Looking back at data since 2022, the bank said the Korean won has shown the highest sensitivity to changes in the yen, with a beta of about 0.45. The Thai baht and the Malaysian ringgit followed, while the offshore yuan and the Taiwan dollar would also be affected.
The report placed particular focus on the won. Goldman said that after USD/KRW rose to around 1350, policy signals from South Korea suggested that officials may be relatively comfortable with the current exchange-rate level. The bank also said that the National Pension Service halting part of its FX hedging, along with overseas investment-related demand for foreign-currency purchases, would slow the pace of further won appreciation.
North Asia and South Asia views remain in place
In North Asia, Goldman said it continues to favor the Taiwan dollar against the yuan and is maintaining its short offshore yuan versus Taiwan dollar view.
In South Asia, the bank said it remains bearish on the Philippine peso and constructive on the Indian rupee versus the peso.
Focus shifts to whether Japanese capital really comes home
Goldman said that if the yen continues to strengthen, Asian currencies could enter another phase of divergence. In that case, the focus in FX markets would shift from one-way moves in the U.S. dollar to whether capital returning to Japan can materially change regional fund flows.
The bank added that a GPIF increase in domestic bond allocation remains part of its scenario analysis and is not an official decision that has already been implemented.