Yen - The "Best Choice" to Hedge Against U.S. Recession and Tariffs?

Goldman Sachs bets on the yen: the best safe-haven currency is about to take off.

Recently, Kamakshya Trivedi, Global Head of Foreign Exchange, Rates and Emerging Markets Strategy at Goldman Sachs, stated in an interview that the yen is the best currency to hedge against the risk of a U.S. recession, and it is expected to rise to the lower end of the 140 range this year, an increase of about 7% from current levels.

As of the time of writing, the USD/JPY exchange rate is 149.83, up slightly by 0.16% during the day.

Trivedi stated:

“The yen performs best when U.S. real interest rates and U.S. stock markets both decline. The Japanese currency is more attractive as a hedge against expectations of U.S. growth downturn than it has been in the past.”

“In this less optimistic scenario, both we and the market are increasing bets on the likelihood of an economic recession, and there is still room for the yen to appreciate.”

Trivedi further pointed out that a series of upcoming U.S. economic data, including Friday's non-farm payroll report, will be a greater driving force for the yen's strength.

Recent trends support his view: the JOLTS job openings report released on Tuesday further indicated a weakening job market, causing the yen to strengthen in response.

Rising tariff risks and narrowing U.S.-Japan interest rate differentials are favorable for the yen

Citigroup believes that in an environment of heightened tariff risks, the yen will also show strength.

In a report released earlier by Citigroup, three possible tariff scenarios were projected for April 2. Except for Scenario 1, “only announcing reciprocal tariffs,” which will not cause significant fluctuations in the USD exchange rate, Scenario 2, “reciprocal tariffs plus VAT,” and Scenario 3, “more aggressive tariff policies,” could significantly drive the USD/JPY exchange rate lower.

Additionally, Bloomberg strategist Mark Cranfield added that the narrowing U.S.-Japan interest rate differential is also expected to drive the yen stronger—previously, the Bank of Japan announced it would reduce long-term bond purchases in the next quarter, which could raise long-term bond yields and narrow the U.S.-Japan interest rate differential.

Although both Goldman Sachs and Citigroup are bullish on the yen, there are still differing voices in the market.

Some opinions point out that hedge funds have reduced their short positions on the yen this year, but overall, they remain bearish on the currency. Aside from a few brief rebounds, speculators have been betting on the Japanese currency's weakness since early 2021.

Over the past four years, the yen has depreciated due to the widening U.S.-Japan interest rate differential, and it fell to 161.95 last July, marking the lowest level since 1986.

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