Goldman Sachs on why buying yen crosses makes sense

The big outlier has been the yen, which has strengthened sharply following the BoJ's shift to negative rates at its January meeting, with markets choosing to interpret the shift as a signal that the "BoJ is out of bullets." We strongly disagree.

Fundamentally, we think this is about whether the BoJ is backing away from its 2 percent inflation target and we see no indication - whatsoever - that this is the case.

In fact, as we argued, the BoJ's implementation of QQE compares favourably to the ECB QE program, given how aggressively the JGB yield curve has been flattened and stabilized.

This means that portfolio rebalancing (out of JGBs into risk assets, including other currencies) is underway in Japan, which is a force for a weaker yen even before additional BoJ easing (which we anticipate) is taken into account.

We see this as a fundamental force for $/JPY higher, in line with our 12-month forecast of 130, even before taking into account that additional easing from the BoJ is likely given that the central bank's commitment to its 2 percent inflation target remains beyond question. Indeed, we think this portfolio rebalancing will only become more powerful given the large flattening in the JGB yield curve that has taken place since the BoJ's move into negative interest rates, given that this is likely to accelerate the search for yield among Japan's investors.

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