NYSEARCA:FXY ETF Bearish Expectations Amid BOJ Tightening

The CurrencyShares Japanese Yen Trust (NYSEARCA:FXY) is an exchange-traded fund (ETF) designed to track the price of the Japanese yen. The ETF has a net asset value of $225.23M and a year-to-date (YTD) daily total return of -5.36% as of its previous close of 67.11. The ETF's inception date was on 2007-02-12.

Brendan Murphy, a money manager at Insight Investment, has recently taken a bearish position on 10-year Japanese government bond futures. Murphy oversees more than $880 billion in assets. His bet is based on the expectation that the Bank of Japan (BOJ) will soon tighten its monetary policy. This view is fueled by increased inflation and the prospect that the BOJ will raise its inflation forecast above 2% for this fiscal year.

Murphy's stance aligns with the market trends reflected in the NYSEARCA:FXY data. From January to July 2023, the FXY ETF has seen a general decrease in its closing price, from a high of 71.66 in January to a recent close of 67.11 in July. This trend reflects a weakening yen, which has been influenced by the BOJ's decision to maintain ultra-dovish policies.

Meanwhile, the USD/JPY pair found support on Monday but remained at sub-139 levels, indicating continued bearish pressure on the Japanese currency. This outlook is mirrored in the daily chart which shows the USD/JPY trading below the 50-day EMA, reflecting bearish near-term momentum, although still above the 200-day EMA, signaling a longer-term bullish trend.

It's worth noting that Murphy is bullish on 30-year Japanese debt, which isn't subject to the BOJ’s control. This implies an expectation of a steeper yield curve in the future as long-term rates rise faster than short-term ones. If this scenario plays out, the FXY ETF could see further downward pressure.

However, there are potential factors that could affect the yen's trajectory. Firstly, the possibility of the Japanese government intervening in the FX markets, as it did last year when the yen reached similar levels, cannot be ignored. Moreover, the Japanese economy's fundamentals have shown mixed signals. On one hand, the au Jibun Bank Japan Manufacturing PMI was at 49.8 in June 2023, indicating a contraction in factory activity. On the other hand, the au Jibun Bank Flash Japan Services Business Activity Index was revised to 54.0 in June 2023, indicating an expansion in the services sector.

The Bank of Japan faces a challenge as sustained inflation increases the pressure for an early adjustment to its yield control policy. Governor Kazuo Ueda has assured that they would maintain the massive stimulus "patiently." However, the central bank's policy meeting on July 27-28 could bring changes as they may revise up their inflation forecasts and express their belief that demand-driven price rises backed by wage growth are taking hold.

Investors are watching closely for a policy tweak that could come as early as this month, likely in the form of an adjustment to the yield target cap, rather than a complete shift away from the ultra-easy policy. Even though such fine-tuning may not significantly impact Japan's economy, it could upset global financial markets as it signifies inflation forcing the BOJ to relent.

In conclusion, the NYSEARCA:FXY ETF's performance and the general health of the yen are closely tied to the Bank of Japan's policy decisions and the overall economic performance of Japan. As of now, the bearish sentiment around the yen seems to dominate, but external factors like potential government intervention and global macroeconomic trends should not be ignored when considering the future path of the FXY ETF and the yen.
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