Business & Finance
Yen rebound offers new entry points for carry trades despite joint intervention
Persistent interest-rate differentials and low domestic borrowing costs encourage Japanese investors to resume overseas buying following market interventions.
The short version
- A temporary strengthening of the Japanese yen following joint U.S.-Japan currency intervention provided institutional investors an opportunity to purchase overseas assets at improved exchange rates.
- Japanese investors net purchased over 5 trillion yen in foreign stocks and long-term bonds in the two weeks ending August 15.
- The yen has depreciated back toward 159 per dollar as the underlying interest-rate gaps between Japan and major global economies persist.
- Market analysts anticipate continued downward pressure on the yen unless domestic interest rates increase sufficiently to narrow the yield differential.
Key facts
- Japanese investors net bought over 5 trillion yen of foreign equities and long-term bonds across the two weeks ending August 15, reversing net sales of more than 300 billion yen from the previous two-week period.[CNBC]
- The yen strengthened from approximately 164 per dollar prior to the joint U.S.-Japan intervention to roughly 155 before retreating toward 159 against the U.S. dollar.[CNBC]
- The yield gap between 10-year U.S. and Japanese government bonds stood at approximately 1.8 percentage points as of mid-August.[CNBC]
- According to CFTC data, leveraged funds reduced net short yen positions from nearly 138,000 contracts in late June to 59,526 contracts by August 11.[CNBC]
What remains uncertain
- Whether the Bank of Japan will adjust interest rates sufficiently to permanently alter the wide bond yield spread with the U.S. and deter further carry trades remains uncertain.[CNBC]