JPY: Reversal in this year’s gains - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the JPY has reverted to a weakening trend since the Trump election and further rise in global bond yields, reversing some of its powerful rally from around 125 in 2015 to around 100 this year.

Key Quotes

“The strength in the JPY through the first three-quarters of the year was a contributing factor to the fall in global yields, creating a self-perpetuating cycle where a strong JPY undermined Japanese inflation expectations and made its QE monetary policy appear ineffective. This generated expectations that the BoJ would have to attempt even more adventurous policy easing.  Each time it balked at further QE or rate cuts, the JPY strengthened further and Japanese investor confidence deteriorated.”

“The Japanese QE forced more Japanese buying of foreign bonds as Japanese yields sunk below zero, further lowering global yields, contributing to less yield disadvantage for JPY. Weaker global confidence in the effectiveness of low yields to stimulate growth generated safe-haven demand for JPY and a search for yield spilling over the strength in currencies like the NZD.  Falling Japanese inflation raised real yields in Japan, tending to support the JPY.”

“This self-perpetuating cycle, vicious or virtuous, depending on your point of view, has now been broken.”

“The BoJ has moved to Yield Curve Control, and this policy now appears very effective in a rising global yield environment.  As yields tend to rise, the BoJ can buy more bonds and increase the duration of purchases, or even sell short-term bonds to buy longer-term bonds.  As such, the USD/JPY 10-year yield advantage has jumped sharply to revisit the high in 2013, while the 2yr yield spread is at a high since 2008.”

“The effective cap in Japanese yields and weaker JPY are likely to raise Japanese inflation expectations and lower real yields.  As such, monetary policy now appears much more effective. There no longer appears to be a shortage of bonds for the BoJ to meet its QE purchase target.”

“In many respects, we view the rise in JPY this year as a perverse development and the JPY as over-bought considering the aggressiveness of the BoJ policy. Incidentally, the BoJ has now committed to continuing with its QQE/YCC policy easing measures until it overshoots its inflation target.”

“Speculative positions are still significantly long JPY and we see this potentially completely reversing back to a net short position as BoJ policy is seen for what it is, designed to weaken the exchange rate and raise inflation, something that the market has lost sight of this year.  As such, in time, we may see a substantial, if not a complete reversal of the fall in USD/JPY over the last year.”