Although USD/JPY drifted back to the top of its recent range around 125 in July, broad USD strength was the main driver, with JPY gaining on most G10 crosses.



"Although the prospects for policy at the September 17 FOMC meeting will clearly be the key determinant of broad USD direction in the near term, at the end-Q3 forecast of 128 for USD/JPY implies independent JPY weakness as well as a general theme of USD strength", says RBC capital markets.

The various measures of capital flows all show strong ongoing demand for foreign equities and the reallocation of public sector assets is the main driver and that there is at least another year of this flow to run.



Positioning should be no impediment to another bout of JPY weakness and an unwind of leveraged positions in H1 is a key reason why JPY did not fall as capital continued to flow out of the country. IMM net shorts have roughly halved since the turn of the year and FX managers' positioning revealed by returns' correlation to USD/JPY is close to a three-year low.



Official resistance to further JPY losses also appears to have diminished significantly. MoF officials have largely been silent on the issue, while BoJ Governor Kuroda has gone out of his way to play down his comments back in June that were seen by many as capping USD/JPY around current levels.



Kuroda now says he did not intend to set a cap on USD/JPY and JPY weakness is "acceptable" so long as the pace is modest.