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This week’s featured insight is our DBS Equilibrium Exchange Rate (DEER) analysis, tracking long-term valuations across major currencies. The Japanese yen (JPY) remains significantly undervalued, hovering near historically weak levels. Following its interventions in the USD/JPY market during April and May, the Japanese government has refrained from further direct action. Although the Bank of Japan's rate hike in June and its guidance toward continued policy normalization have prompted some reduction in speculative short positions, bearish positioning on the yen remains elevated. More impactful measures to support the currency could emerge through policy initiatives encouraging Japanese pension funds—including the Government Pension Investment Fund (GPIF)—to increase allocations to domestic assets.
Japanese Finance Minister Katayama alluded to this possibility in a speech on 10 July, stating that the government would pursue policies aimed at encouraging pension funds to invest more heavily in Japanese assets. Such a reallocation from overseas holdings to domestic investments is compelling not only from a political perspective but also on economic grounds. Even setting aside Prime Minister Takaichi's advocacy for greater domestic investment through public-private partnerships, the long-term investment case for Japanese assets remains attractive. The yen and Japanese government bonds (JGBs) are currently trading at some of their most attractive valuations in decades, in stark contrast to many foreign equities and currencies, which appear richly valued when measured in JPY terms.
The US dollar (USD), meanwhile, is gradually relinquishing some of its overvaluation as oil prices normalize toward pre-conflict levels following the restoration of energy shipping through the Strait of Hormuz. While geopolitical uncertainties persist and the United States and Iran have yet to reach a comprehensive peace agreement, President Trump appears reluctant to engage in a broader conflict that could significantly disrupt global energy supply chains and increase recession risks. Nevertheless, any decline in the USD is likely to be measured rather than abrupt, supported by several temporary factors, including the FIFA World Cup, a major IPO completed in June, and substantial private funding rounds for US artificial intelligence and aerospace companies. However, should capital markets sentiment soften, the dollar's elevated valuation could leave it vulnerable to a more pronounced correction.
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The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
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