On 18th Jan 2025, we wrote a trade recommendation of Long JPY against USD at 156.30 levels. Since then, USDJPY has fallen to 151.4 levels as per our expectations. But we believe the final destination is much lower at 140 odd levels by end CY25. We have been of the view that BOJ Governor Ueda was a hawk from his teaching days. We had written on 12th June'24 that we expected 2 yr Japanese OIS to reach .75 when it was at .38 levels. This level was reached finally on 24th Jan'25. Even now we believe that the market is not pricing in full scale of BOJ hikes. Market pricing shows only 33 bps of hike by end CY25. We believe BOJ can hike by 50-75 bps by Mar'26. Reasons are elevated real wages, high inflation as well as the BOJ composition itself. Japanese nominal wages rose at the fastest pace in Dec’24 in nearly three decades. Japanese real wages grew for a second consecutive month in December, despite accelerating inflation. Even the annual Shunto negotiations are expected to be better than last year. We expect this year’s Shunto negotiations can result in 2025 spring wage hike of 5% against 2024 spring wage hike of 4.7%. Japan is now in an environment of inflation as Ueda himself commented last week. The 24th Jan 25 bps hike by BOJ was unique as it did not ruffle the global risk environment by a major equity sell off. It was absorbed smoothly by risk assets. This must have further emboldened the hawks on BOJ that future rate hikes can be considered without impacting equity sell offs both globally & locally. But we believe that suddenly global risk assets might realise that the era of carry trade is over if Japanese 2 year yields start trading over 1% (currently at 0.8%). The largest casualties will be Emerging Market equities and US large tech names in NASDAQ. FX pairs such as EURJPY, GBPJPY & CHFJPY are sitting at major support levels which we expect to be broken.
