TOKYO: The yen sinking to even deeper lows. Short sellers driving Japanese bond yields through the central bank’s target. Stocks on a rollercoaster ride and credit investors running for the sidelines.
These are some of the scenarios investors envisage as Haruhiko Kuroda doggedly clings to ultra-low interest rates in his final nine months as Bank of Japan governor.
His clash with the markets looks set to intensify as runaway inflation forces global rates higher, while he tries to resist long enough to entrench price gains in Japan.
“It all comes down to the BoJ’s policy and the weakness of the yen,” said Amir Anvarzadeh, a strategist at Asymmetric Advisors Pte, who has tracked Japanese markets closely for three decades.
“How the BoJ navigates monetary policy and inflation will impact everything from stocks to credit and provide opportunities to short JGBs, it will keep happening until their view on rates changes.”
In the meantime, Wall Street is lining up its bets. Brown Brothers Harriman & Co tips the yen to slump past 140 versus the dollar, a view shared by hedge funds and one that implies the BoJ will let Japan’s yield gap with the world widen.
Yet the weaker currency may ultimately force Kuroda to relent.
JPMorgan Asset Management is selling government bonds on a wager he’ll loosen his grip, letting benchmark yields rise in Japan like elsewhere.
SMBC Nikko Securities Inc projects more losses for equities before a recovery toward year-end, while credit funds are wary of investing at all until volatility subsides.
Selling the yen remains one of the hottest macro trades after Kuroda rammed home the message at the last policy meeting in June that it’s too early to cut back on stimulus.
The worst-performing Group of 10 currency this year fell to 137 per dollar last week, the lowest since 1998.
Credit Suisse Group AG strategists forecast a drop to 138 over the next three months while JPMorgan Chase & Co envisage a test of 140.
“With BoJ dovishness being maintained, we still believe the pair will eventually test the August 1998 high near 147.65,” Win Thin, New York-based global head of currency strategy at Brown Brothers, wrote in a note.
Still, the yen’s swings are closely tied to treasuries and demand for the dollar. A peak in US rate-hike expectations in the coming months may soothe some nerves and fears of a recession could spur a rally in haven assets, including the yen.
“If you believe the US Federal Reserve (Fed) will be successful on inflation, then the dollar peak could come as we expect around the turn of the year,” said National Australia Bank Ltd’s Rodrigo Catril. That’s “a dynamic that should see dollar-yen trading sub-130 by the end of the second half of 2022.”
The yen traded around 135 versus the dollar in Tokyo yesterday.
Traders may also boost bearish bets on the nation’s US$9 trillion bond market.
Graticule Asset Management Asia Pte, Schroders Plc and BlueBay Asset Management are among funds selling JGBs.
Ten-year yen interest-rate swaps have crossed the central bank’s 0.25% line in the sand, signaling investors expect policymakers will be forced to capitulate.
“We are negative on Japanese Government Bonds,” said Arjun Vij, a money manager at JPMorgan Asset, who is shorting the bonds.
Investors “will continue to test the BoJ’s commitment to the yield-curve control, but ultimately, the BoJ will only shift its stance when the economic and political environment is right.”
Should the yen breach the 150 level and lift Japan’s core price growth further, it may “fulfill the necessary conditions for sustained inflation and cause the BoJ to respond,” Morgan Stanley strategists, including Chetan Ahya, wrote in a note.
The BoJ would “move quickly to shift its forward guidance, adjust its yield curve control target and hike policy rates by 15 basis points in a subsequent meeting.”
But getting the timing right could be tricky. While inflation data for Tokyo released on Friday showed headline price gains of 2.3% in June, the increase was less than half this after stripping out volatile inputs for fresh food and energy.
The underlying price trend remains too weak to make recent core inflation moves above 2% sustainable and to force a shift from Kuroda, Kazuo Momma, a former top official in charge of monetary policy at the central bank, said.
- Bloomberg
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