Japanese Yen Analysis: USD/JPY Repatriation Flows vs. Bullish Technicals

Key Points

• Japanese insurers may have to repatriate funds after the New Year’s Day tsunami and earthquakes in Western Japan.
• All else equal, these flows could weigh on USD/JPY, but…
• …the technical outlook for USD/JPY is tentatively bullish with room up toward 145.00 if today’s breakout holds.

USD/JPY Fundamental Analysis

Japanese markets remain closed for an extended holiday to start the new year, but traders may see some unusual flows when they reopen tonight. As a result of a tsunami and series of earthquakes in Western Japan on Monday, the country has experienced significant human and property damage.

Without downplaying the tragic human cost of the natural disaster, it’s also worth understanding the financial cost to Japanese insurers. Insurance companies receive upfront payments for premiums and can then invest that “float” to earn a return until they need to pay out claims. With Japanese interest rates hovering at 0% for most of the past 3 decades, Japan’s insurers tend to invest outside the country, but when there is a big natural disaster, they have to repatriate their funds (sell foreign assets – often US bonds – and buy back yen). Some analysts are speculating that these “repatriation” flows are contributing to the uptick in US bond yields (drop in bond prices) to start the year.

As Japanese markets reopen, insurance repatriation flows could well boost the yen (weigh on USD/JPY) over the next week or two.

Japanese Yen Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

Despite the potentially bearish implications from repatriation flows, USD/JPY’s chart is showing signs of turning higher after spending the last 7 weeks of 2023 in a clear downtrend. The first sign of a potential reversal emerged late last week, when USD/JPY failed to break definitively below the previous trend low at 141.00, forming a bullish divergence with its 14-day RSI in the process. For the uninitiated, a bullish divergence occurs when an asset makes a lower low in its price, but a momentum oscillator makes a “higher low;” this combination signals that selling pressure is waning and is often seen a near-term lows in a market.

Since we flipped our calendars to 2024, we’ve seen USD/JPY rally yesterday and extend its gains so far today, with rates currently peeking out above the bearish trend line that has capped the pair since mid-November. A close near current levels would open the door for a bullish continuation to start the year, with potential for an initial rally toward previous support/resistance at 145.00 next.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX