BNY’s Geoff Yu notes that Japanese Yen (JPY) strength is reshaping APAC (Asia-Pacific) FX dynamics by easing prior effective exchange rate pressures and allowing more nominal appreciation in regional currencies. The report stays structurally constructive on JPY as long as current-account support holds, but cautions that a renewed Oil shock would reverse gains and force further reserve-asset liquidation across Asia.

Stronger Yen reshapes Asia FX dynamics

“JPY’s importance in regional FX trade-weighted baskets is often overlooked outside of USD/JPY.”

“While the U.S. is clearly fixated on USD/JPY, JPY is a major trading partner and competitor with economies in the region.”

“A weak JPY was already pushing up the real- and nominal effective exchange rates of these currencies, which allowed little scope for appreciation elsewhere.”

“JPY’s move and U.S. tolerance for clear dollar weakness has created space for the rest of the region to appreciate their own currencies in nominal terms: a stronger JPY offsets any gains on the dollar leg, and strong current U.S. inflation also prevents excessive dollar weakness in real terms.”

“Stay structurally constructive on JPY, KRW and CNY while current-account support holds, but monitor energy prices closely: a renewed oil shock would weaken regional FX and raise the risk of further reserve-asset liquidation.”