Japan’s yen feels the heat from hard-line BOJ policy


SINGAPORE : Japan’s yen, lengthy favoured as a safe-haven and funding forex, has in latest weeks change into so enmeshed in market hypothesis over central financial institution coverage that Wednesday’s resolution to retain the established order set off the steepest yen fall in practically three years.

The yen dropped greater than 2 per cent after the Financial institution of Japan mentioned it was sticking to its controversial yield management coverage, in defiance of market expectations of a tweak to its yield cap or different settings. These expectations had pushed a 14 per cent rally within the yen up to now three months. Within the bond market, the place the central financial institution has battled bond bears to defend its yield cap, the BOJ has purchased up so lots of Japan’s excellent 10-year authorities bonds that market liquidity has nearly dried up.

Speculators have seemed instead to the yen, a better goal the place their bets on BOJ coverage have induced huge swings and historic ranges of volatility.

Moh Siong Sim, forex strategist at Financial institution of Singapore, mentioned it was a query of when, not if, the BOJ shifts its ultra-dovish stance, and the market would proceed to check that by pushing the yen increased.

“For our purchasers, they consider the yen as a funding currency. Which will need to shift,” Sim mentioned.

Till late final 12 months, the BOJ’s dovishness within the face of aggressive fee rises by the Federal Reserve and different main central banks meant the yen was low cost and weak, making it the proper forex to borrow for investments.

However it’s not really easy now, Sim mentioned.

“A one-sided story is beginning to flip around, and now it includes a bit extra of a balancing act, between the low borrowing price and forex strikes.”

Because the yen rallied greater than 15 per cent from October’s 32-year low of 151.94 per greenback to final week’s peak close to 127, volatility spiked. The overnight volatility priced into yen choices is round a six-year excessive of 54 per cent.


Analysts anticipate bets on the BOJ quickly abandoning its yield curve management coverage will get larger and louder, for a variety of causes.

Some traders anticipate the central financial institution to make use of proof of rising inflation and a change of the guard on the BOJ in April as an excuse to make a transfer. Home traders say the pressures of managing a extremely distorted yield curve and growing bond market dysfunction are ample motive for the BOJ to behave.

Most of that hypothesis needs to be channelled into the yen.

Tareck Horchani, head of dealing, prime brokerage, at Maybank Securities, mentioned macro funds have been shopping for spinoff buildings and put choices on the dollar-yen pair, betting on the yen heading to 115 or 110.

Even fairness fund managers investing in Japan have stopped hedging their forex publicity within the hope of cashing in on yen appreciation, he mentioned. James Athey, an funding director at fund supervisor abrdn, has held an extended place on the yen for some time.

“We have been fairly well-positioned for the transfer in December from the BOJ. We had a major chubby on the Japanese yen, (and) within the aftermath, we took revenue on a few of our yen place,” Athey mentioned.

Rises in bond yields and the yen may create a vicious tailwind of fund repatriation flows into Japan, but some traders anticipate the yen’s path increased will not comply with a straight line.

Amongst these watching from the sidelines are hedge funds that took a success on their short-yen trades, which have been massively worthwhile for about 10 months of 2022 till a swift reversal within the yen in the previous few months.

“Macro hedge funds that misplaced cash within the closing months of 2022 on their long-dollar positions are simply mildly positioned for a yen rally and are fearful a few sharp reversal,” mentioned Maybank’s Horchani.

Such uncertainty can be a problem for the allocations of inventory traders, who benefited from a less expensive yen final 12 months as exports turned extra aggressive and lots of Japanese corporations bought an earnings increase, lifting the Nikkei.

“The talk round the way forward for BOJ coverage is way from settled,” mentioned Howard Smith, accomplice and portfolio supervisor at Indus Japan Methods.

Smith nonetheless sees worth in Japanese property and firms because the yen heads for 120 per greenback, and even 110, however for now he’s solely partially unhedged in his fund’s long-short merchandise.


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