The greenback has surged 24 percent against its Japanese counterpart in the past six months, climbing as high as 99.95 yen in April. The push toward 100 stalled as a decline in Treasury yields curbed Japanese demand for U.S. securities. Investors in the Asian nation have sold foreign bonds for six straight weeks.
Now Treasury yields are rising, which will increase purchases of U.S. debt, said Mitul Kotecha, Credit Agricole’s Hong Kong-based head of global markets research for Asia, who wrote the report. Japanese life insurance companies may be planning to reduce their dollar hedges, he said.
“There’s every sense that this repatriation that we’ve seen in recent weeks is going to give way to a pretty significant outflow” of funds from Japan, Kotecha said. “The trend in the last four years has been for declining hedge ratios. It would be very surprising, at a time when the yen is coming under more pressure, to see an increase in the hedge ratio.”
Credit Agricole expects “a break of 100 to occur very soon,” his report said.
The dollar will rise to 104 yen by year-end, Kotecha said, from 98.80 today as of 7:48 a.m. in London.
Ten-year Treasuries yielded 1.18 percentage points more than their Japanese counterparts, widening from 1.04 percentage points on May 1. The average over the past 12 months is 0.99 percentage points.
Japan’s nine biggest life insurers hedged 70.8 percent of their currency holdings as of March 2012, Kotecha said. It was the lowest level since 2008 and a good sign for the dollar, he said.
Fukoku Mutual Life Insurance Co. is hedging less than half of its dollar holdings now, a more bullish position than usual, said Yoshiyuki Suzuki, the head of the fixed-income department in Tokyo.
Nippon Life Insurance Co., the largest life insurer in Japan, said last month it may include currency hedges when buying bonds outside the nation.
Japanese investors sold a net 3.43 trillion yen ($34.7 billion) of overseas bonds in the six weeks ended April 19, Ministry of Finance figures showed.
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