Japanese Yen: Japan export controls and strong sales support JPY risk premium – BNY

§ 01 Executive Snapshot

• What: Japan's export controls and strong commercial sales are influencing the JPY risk premium.
• Who: BNY's Geoff Yu, Japanese entities, Chinese government.
• Why it matters: The geopolitical tensions and supply chain risks are affecting the Japanese economy and currency positioning.

§ 02 Key Developments

• China has added 20 Japanese organizations to its export control list, raising supply chain risks for defense and rare earths.
• Japanese commercial sales for May reached ¥52.549 trillion, marking a 5.0% increase year-over-year and a 1.4% increase month-over-month.
• Despite strong commercial sales, JPY outflows and negative scored holdings suggest persistent bearish positioning in the market.

§ 03 Strategic Context

• The geopolitical dispute between China and Japan has intensified, impacting trade relations and supply chain dynamics, particularly in defense and rare earths.
• Japan's strong commercial sales indicate resilience in domestic demand, contrasting with the negative market sentiment reflected in currency flows.

§ 04 Strategic Implications

• The addition of Japanese firms to China's export control list may lead to increased supply chain vulnerabilities, particularly in critical industries.
• Long-term implications may include shifts in trade patterns and increased efforts by Japan to secure alternative supply chains.

§ 05 Risks & Constraints

• Regulatory risks from ongoing geopolitical tensions could further disrupt trade between China and Japan.
• The potential for continued outflows from JPY could impact its valuation and stability in the foreign exchange markets.

§ 06 Watchlist / Forward Signals

• Monitoring upcoming trade negotiations and any changes in Japan's defense policy could signal shifts in market sentiment.
• Future commercial sales data will be crucial to assess whether the current growth trend continues amidst geopolitical tensions.