The yen has gained some government support, though markets remain skeptical.
Finance Minister Satsuki Katayama said the government was exploring measures to encourage GPIF and other pension funds to increase investment in domestic assets, helping lift the yen and pull 10-year JGB yields back from nearly 30-year highs near the technically significant 2.83% level. Katayama's remarks add to a series of government efforts to calm JGB markets, including Chief Cabinet Secretary Minoru Kihara saying Thursday that authorities were closely monitoring developments and remained committed to steadily lowering Japan's debt-to-GDP ratio.
Absent concrete policy details, investors are largely viewing the remarks as an attempt to talk down JGB yields and bolster the yen.
However, a shift in pension fund allocations toward domestic assets could help reverse some of the capital outflows that have weighed on the yen since the start of Abenomics. The currency's decline from around 80 per dollar in 2012 has coincided with pension funds lifting overseas allocations to about 50% from just over 20%. For yen bulls, Katayama's emphasis on BOJ independence, reports the BOJ may upgrade its growth outlook and signs of persistent inflation strengthen the case for further rate hikes, supporting the currency. A stronger-than-expected annual rise of 7.1% in Japan's corporate goods prices in June further bolsters the case.
While the yen's rebound has revived favorable July seasonals, the main challenge for bulls is higher-for-longer U.S. rates and low FX volatility continuing to support short-yen positions. Next week's U.S. CPI could reinforce that outlook.
The 162.84 YTD high looks less threatened, but USD/JPY needs
a close below the 21-day moving average near 161.60 and then the
160.00 psychological level to signal a more durable turn in
favor of the yen. Intervention that forces out excessive
speculative short-yen positions would further strengthen that
case.
JGBs
Yen
(Robert Fullem is a Reuters market analyst. The views expressed
are his own.)
