Japanese Yen: Changing fundamentals challenge carry – Rabobank

Rabobank's Senior FX Strategist Jane Foley says speculation over a structural shift in Japanese Yen (JPY) valuation is challenging traditional carry trade assumptions and Japanese investors’ appetite for foreign assets. Rising JGB yields, resilient growth and stronger real wages increasingly support the Yen, particularly if the BoJ turns more hawkish.

Resilient data and BoJ risks back Yen

"A second factor impacting sentiment relates to market speculation as to whether there has finally been a sea-change in the value of the JPY. This has implications for long-standing views on the carry trade and also on whether domestic Japanese investors may be less incentivised to hold foreign assets including US treasuries."

"The clear problem relates to the use of the JPY as a funding currency and specifically whether there is room for the recent rapid unwind of JPY shorts to accelerate near-term. Moreover, an appreciating JPY would bring fresh uncertainty over whether domestic Japanese investors would have less incentive to look for opportunity abroad."

"The rise in JGB yields has already made this a topical theme. Indeed, the market has suspected that the US Treasury has been worried about large Japanese insurers potentially selling US government debt for JGBs for some time."

"Even though there were some unconfirmed suspicions regarding price checking in USD/JPY by the Japanese authorities last week, the more recent surge in the value of the JPY appears to have happened without the aid of the authorities. This is more powerful than a move triggered by intervention since it signals that the market may be reflecting a change in Japanese fundamentals."

"Greater evidence of domestically generated inflation stemming from real wage data, a resilient economy aided by corporate Japan’s involvement in the semi-conductor supply chain and stock market reforms are all JPY supportive factors. While the JPY will be vulnerable on anything other than a hawkish tone from the BoJ this month, we remain constructive on the JPY medium-term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)