This week, the Japanese currency surprised money managers when it reached an all-time high. According to experts, this surge can be best attributed to the changes in bond market.
Beijing, China, May 25, 2016 — Given the fluctuations in the Japanese economy, the authorities had not expected such a rise in the Yen. However, the currency astonished some when it showed a gush of about 3% against the dollar this week. This has been Yen’s most noticeable and substantial surge since February. What’s more surprising is the fact that this surge came at a time when the country’s bond yields are negative for most maturities. In the past, negative bond yields had been the key factor responsible for dwindling interests in the Japanese currency.
However, the banks have been pointing to a decrease in inflation as the prime factor that could have led to such an unexpected rise in the Yen. They have been studying different metrics to pin-point various factors that could have caused the Yen to perform so well. It’s believed that another factor that could have led to this change is the decrease in United States real yields in the recent past. The banks have now predicted that by the end of September, the dollar could drop further down to 105 Yen.
According to Michael Lane, the Global Co-Head of the Investment Management Division of Shizuoka Capital Wealth Management based in Tokyo, who manages $2bn of institutional investor’s assets, “When we take into account the decreasing inflation, it becomes easier to overlook the 10-year Japanese Debt which United States holds over the country.”
According to Mr. Lane, if the United States manages to keep real yields high, it will be able to diminish the export of capital which has been a key factor in causing Yen’s rise against the dollar.
The Yen’s gains weren’t limited to the dollar. The Yen has performed well against most major currencies. It has showed a boost of almost 2% in general. This has been Yen’s strongest performance since October 31, 2014 when the Japanese authorities released the monetary stimulus program to support the Japanese economy.
So, what does the future hold for Yen?
The Japanese currency, has registered a growth of almost 11 percent since the start of 2016. This was a blow to some analysts who had predicted In early January, that the Yen would fall during the year, down to 124 against the dollar by March end.
The Yen’s strong performance has been even more surprising given the fact that Japanese economy has been struggling since the middle of 2013. Machinery prices have been declining and producer prices have been dwindling too.
The Japanese authorities have voiced their concern on the issue. Taro Aso, the Japanese Finance Minister, gave a statement saying that an unpredictable and undesirable growth in any currency is a trend that should be seen with some suspicion. Similar statements were also heard coming from Yoshihide Suga, the Chief Cabinet Secretary of Japan. However, the Prime Minister of Japan, Shinzo Abe, quelled all such concerns by pledging to stay away from arbitrary intervention.
Traders continue to bet on the Yen.
Speculators, however, have been undisturbed by these recent developments. They have continued to show trust in the future of the Yen.
According to the Shizuoka Capital Wealth Management, analysts and hedge funds have escalated their net bullish position on the Japanese currency. By the end of April 5, about 60,000 contracts had showed trust in the future of the Yen and had predicted a further rise in Japan’s currency. These contracts weigh highest since 2008 – a positive sign for Yen values.
Yet another important thing to keep in mind is that United States’ dominance over Japan has reduced since Japan’s real yield on 10-year U.S debt has reduced from 1.1 percentage point to 0.6 percentage point.
According to Michael Lane, “The Yen will continue to rise even more in the coming term. Since inflation is expected to continue to decline, Japanese real yields will show positive growth and influence the country’s currency positively.”
About Shizuoka Capital Wealth Management:
The company is engaged in wealth management services such as securities, the buying and selling of corporate debt, handling mergers and acquisitions, private equity and fixed income. Founded in 2006 with Headquarters in Tokyo, Japan. As of 2015 the company assets were in the region of $6bn.
Shizuoka Capital Wealth Management