Yen Nearing Cyclical Low Signals Shift in Bond Investments

Derek Halpenny from MUFG pointed out that the Japanese yen (JPY) is lingering close to a cyclical low. However, indications from the Government Pension Investment Fund (GPIF) and Nippon Trust suggest a renewed interest in government bonds. Halpenny believes that officially ending Abenomics-inspired risk-taking could be pivotal. This might lead to a greater allocation toward domestic bonds and perhaps more government bond purchases, potentially strengthening the yen as Bank of Japan (BOJ) policies start to normalize.

Increased Demand for Government Bonds Observed

“The yen is still near its cyclical lows. Recent US economic data, along with the risk of rising oil prices, is dampening appetite for selling the US dollar after the weakness seen in CPI and PPI. I think this marks a significant departure from the Abenomics era, which heavily promoted investing in riskier assets for better returns, like in pensions. This shift could restore trust in Japan’s pension framework and might help reduce excessive savings,” Halpenny noted.

“The GPIF has upped its domestic bond allocation from 23.9% at the close of FY 2019 (around March 2020) to 26.9% currently. Given the fund’s guidelines, moving that percentage to 31% could potentially amount to about 12 trillion yen in government bond purchases—more if the fund continues to expand.”

“That said, policy measures have their limits, and the Bank of Japan needs to facilitate more domestic investment. This week, the government added a note to its Economic and Fiscal Policy Plan, underscoring the central bank’s autonomy as outlined in the Bank of Japan Act. There’s a clear effort to counter claims that Prime Minister Takaichi is advocating for an interest rate hike from the Bank of Japan.”

“The Bank of Japan must now demonstrate that it operates independently from the government. Raising interest rates in September would be a solid step in that direction, aiding in the potential appreciation of the yen.”