When will the depreciation of the yen reverse? According to J.P. Morgan, the range of 155-165 may become a volatile zone, and four key signals could trigger a significant rise in the yen.

The depreciation of the yen is slowing down, but a true trend reversal still lacks key catalysts. On September 1, JPMorgan's Global Market Strategy Team released an analysis stating that after the USD/JPY hit the medium- to long-term target of 164, the downtrend has eased. The coordinated intervention by Japan and the U.S. at the end of July and the market's rising expectations for interest rate hikes by the Bank of Japan (BOJ) have both provided support for the yen. However, looking at capital flows, short positions on the yen remain substantial. Since October 2025, there has been a cumulative net purchase of approximately 40.7 trillion yen in the balance of payments, but "off-balance" capital flows have net sold about 57.1 trillion yen, leaving a net short position of around 16.4 trillion yen after offsetting. JPMorgan believes that as long as the BOJ maintains roughly one interest rate hike per quarter and there are no significant changes in U.S. monetary policy, the USD/JPY will likely remain in a trading range of 155-165. A true reversal may come from short sellers of the yen closing their positions. JPMorgan estimates that the current scale of yen shorts is about 60%-80% of the peak in the summer of 2024. If a comprehensive short squeeze is triggered, the USD/JPY could drop by 14-18 yen, targeting the 142-146 range. Four major signals are worth closely watching: rising expectations for the Federal Reserve to cut interest rates, a faster pace of BOJ rate hikes leading to adjustments in Japanese stocks, a significant increase in the GPIFs allocation to yen assets, and an expansion of U.S. dollar interventions. Four signals may trigger a significant rise in the yen. If the USD/JPY drops below 155 and further approaches 150, JPMorgan believes the following four factors deserve close attention: First, expectations for Fed rate cuts warming up again. A significant weakening of the U.S. economy will compress the interest rate gap between the U.S. and Japan, reducing the attractiveness of carry trades and prompting yen short sellers to retreat. Second, accelerated BOJ rate hikes triggering adjustments in Japanese stocks. If rate hikes exceed expectations and cause Japanese stocks to fall, overseas investors may unwind prior yen short hedges, creating a chain reaction of "stock decline position closure yen purchases." Third, the GPIF significantly increasing its allocation to yen assets. If the GPIF further adjusts its core investment portfolio to increase the weight of domestic bonds and stocks, potential yen buying could significantly expand. JPMorgan estimates that even just raising the weight of these two asset classes from a 25% midpoint to a 31% upper limit within the existing framework could generate over 30 trillion yen in capital flow. However, the GPIF functions more like a "buffer" for the yen and may not be sufficient to drive the USD/JPY below 155 quickly on its own. Fourth, the U.S. expanding dollar interventions. If the U.S. shifts from intervening through cross-currency trading to directly selling dollars or expands the FIMA repo facility, the market impact could far exceed current expectations. If shorts are forced to cover, 142-146 may become the first target area. Once the yen enters a phase of short covering, the degree of appreciation could be significantly magnified. JPMorgan estimates that the current scale of yen shorts is about 60%-80% of the peak in the summer of 2024. At that time, unexpected rate hikes by the BOJ combined with concerns over a U.S. economic recession led the USD/JPY to fall by up to 23 yen. If the historical scale of shorts is fully covered, the current USD/JPY could drop by 14-18 yen, corresponding to the 142-146 range; additionally, based on the swap rate differentials between the U.S. and Japan, the current fair value for the exchange rate is around 144. This suggests that once short sellers start to cover, the downward movement of the USD/JPY could be much greater than just changes in policy expectations. Of course, the yen may also weaken again. If the BOJ raises rates slower than expected, the market might revert to trading on the logic of "political pressure repressing monetary normalization"; if the Fed instead maintains high rates or turns hawkish again, the interest rate differentials between the U.S. and Japan could expand once more. Japan's fiscal risks are another important variable. The Japanese government's expansionary fiscal policy continues to raise market concerns, with unclear financing for consumption tax cuts and defense spending, and an investment plan totaling 370 trillion yen set to last until the fiscal year 2040. Furthermore, BOJ rate hikes could increase government interest expenditures, raising the risk of a downgrade to Japan's sovereign debt rating. This article is reprinted from "Wall Street Watch," author: Li Jia; GMTEight editor: Chen Siyu.