JPMorgan sees yen short squeeze to 142 as BoJ hikes

JPMorgan sees a yen short squeeze driving USD/JPY toward 142-146 if the Bank of Japan accelerates hikes, with four triggers on watch.

The yen's slide has stalled near 164, but JPMorgan warns a short base at 60-80 percent of the 2024 peak leaves USD/JPY exposed to a 14-18 yen squeeze toward 142-146 if the Bank of Japan accelerates hikes.

"Corporate earnings have weathered a potentially negative impact of recent rate hikes, and the outlook is strong enough to reinforce the view that further rate increases would not pose a problem," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

JPMorgan's global markets strategy team, in a Sept. 1 note, put the yen's fair value near 144 based on one-year, one-year swap spreads and sees USD/JPY trading in a 155-165 range as long as the BoJ keeps hiking roughly once a quarter and U.S. policy holds. Balance-of-payments data show net yen buying of 40.7 trillion yen since October 2025, but off-balance-sheet flows show net selling of 57.1 trillion yen, leaving about 16.4 trillion yen of unaccounted short positioning.

The squeeze risk turns on four triggers: renewed Fed rate-cut expectations, a BoJ hike fast enough to knock the Nikkei, a bigger yen-asset allocation from Japan's Government Pension Investment Fund, and expanded U.S. dollar intervention. The BoJ meets Sept. 17-18, with sources telling Reuters the board is set to raise rates and may hike more aggressively than the current pace of about two moves a year.

Four triggers on the yen

A U.S. slowdown that revives Fed cut bets would narrow the Japan-U.S. rate differential and strip the appeal of carry trades funded in yen, JPMorgan said. A BoJ move that surprises markets and drags the Nikkei lower could force overseas investors to unwind yen-short hedges, setting off a stock-drop, cover, buy-yen chain. GPIF, the world's largest pension pool, could lift its combined weighting in domestic bonds and equities from a 25 percent midpoint to a 31 percent ceiling, generating more than 30 trillion yen of potential yen buying — though JPMorgan called it a buffer unlikely to push USD/JPY below 155 on its own. The fourth trigger is U.S. intervention, should Washington shift from cross-currency operations to direct dollar selling or expand its FIMA repo facility.

The 2024 precedent

The last short-covering episode came in summer 2024, when a surprise BoJ hike collided with U.S. recession fears and drove USD/JPY down as much as 23 yen. With current shorts at 60-80 percent of that peak, a full unwind would imply a 14-18 yen drop, pointing to the 142-146 zone.

The downside risks

The yen could weaken again if the BoJ hikes more slowly than expected, reviving the view that political pressure is restraining policy normalization, or if the Fed holds rates high or turns hawkish. Japan's fiscal position is a separate risk: the government's 370 trillion yen public-private investment plan runs through fiscal 2040, with consumption-tax cuts and defense funding still unfunded, and BoJ hikes would lift government interest costs and raise the chance of a JGB downgrade.

This article is for informational purposes only and does not constitute investment advice.