We have shifted to a modest long position in the Japanese yen against the euro in our multi-asset portfolios. The trade should benefit from yen weakening after the Bank of Japan dashed market pressure for higher interest rates. With EUR/JPY now trading at the top of its range over recent years, we see the yen as attractively valued from a longer-term perspective.
The euro by contrast appears to be well priced for what we see as an unrealistically positive scenario this year (one of ultimate economic stability rather than recession and a problem-free resolution of the energy crisis, even as the war in Ukraine continues). The market also appears to have become more optimistic on the euro, foreseeing less of a need for higher official rates to fight inflation.
We expect the market to test the BoJ again on its policy of maintaining a cap on 10-year bond yields, even as inflation in Japan is rising. We expect a shift to a more hawkish stance, which should benefit the yen. Being long JPY vs. the EUR can also be seen as an opportunistic hedge.
BoJ maintains yield cap
At its 18 January policy meeting, the BoJ resisted market pressure and left its yield curve control (YCC) measures intact, weakening the yen and pushing Japanese stocks higher. There had been calls for the BoJ to end a two-decade experiment in massive monetary easing. The decision followed weeks of turmoil in the Japanese government bond market during which yields have surged.
In December, the BoJ unexpectedly decided to allow a higher target yield ceiling on 10-year government debt — permitting yields to fluctuate by a wider 0.5% above or below its target of 0%. Ending the cap on yields in effect pushes up interest rates.
Since the December policy meeting, 10-year government bond yields have risen to above 0.5%. This has prompted markets to pressure the central bank to drop the yield target altogether.
Asset class views
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