Yen Gains Sideline Kuroda as Volatility Sweeps Rates Shock Aside

Yen Matters Far Less Than Most Investors Think: CLSA
  • Options protecting against yen gains cost most since 2010
  • Morgan Stanley says verbal intervention now a possibility

Haruhiko Kuroda has a problem: traders are paying more attention to the volatility sweeping global markets than the Bank of Japan governor’s monetary easing.

The result is the yen has climbed against almost all of the more than 150 currencies tracked by Bloomberg since the central bank embraced negative interest rates on Jan. 29. The shock announcement, which initially weakened the yen, has been overwhelmed by investors pouring into Japan’s currency as a haven.

The trend shows few signs of slowing. The yen is already the strongest in more than a year versus the dollar; the cost of options that would profit from further gains is the highest since 2010; and speculators have turned bullish on Japan’s currency for the first time in more than three years. That’s a threat to the nation’s efforts to re-invigorate its economy because it may curb inflation and make exports more expensive.

“A global wave of risk aversion is coming and the yen has more upside against the dollar until this sentiment settles down,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management, which oversees about $6.6 billion.

Kuroda may find it hard to stem the tide. Investors are dumping assets perceived to be higher risk in favor of the yen as a slowdown in global growth batters emerging markets, commodities and financial institutions. While about $7.9 trillion has been wiped from equities worldwide this year, around 30 percent of global sovereign bonds -- another relatively safe asset -- now yield less than zero.

Japanese Finance Minister Taro Aso Tuesday pointed to “rough moves” in the market and, signaling concern about the $5.3 trillion-a-day currency market, said he’ll continue to monitor developments there.

The yen has climbed 5.3 percent against the dollar this month, the most among its Group-of-10 peers, and reached 114.21 Tuesday, the strongest level since November 2014. It gained 0.1 percent Wednesday to 114.96 as of 10:05 a.m. London time.

It’s up more than 9 percent this month against the world’s worst-performing major currencies, including the Russian ruble and Mexican peso. And the turmoil has ratcheted up JPMorgan Chase & Co.’s Global FX Volatility Index to 11.9 percent, the highest based on closing prices since mid-2012 and up from 10.3 percent on Feb. 1.

As well as highlighting the limits of the BOJ’s negative-rate policy, the yen’s advance shows how investors are losing faith in Kuroda’s ability to expand his already unprecedented bond purchases, which aim to stoke growth and inflation by freeing up money to circulate in the economy.

Markets ‘Overextended’

“Volatility is feeding back through the system, and as volatility comes back, risk-adjusted returns fall and markets generally feel like they’re overextended,” said Vimal Gor, head of fixed-income in Sydney at BT Investment Management, which oversees more than $10 billion. “The BOJ needs to do more and more and more each time to keep the yen weak, because the natural pressure is for it to continue to appreciate.”

Gor remains bullish on the yen even as he predicts further BOJ easing. He said he was short the Japanese currency going into the last interest-rate decision, meaning he was speculating on a decline, before reverting to betting on a stronger yen soon afterward. The money manager predicts an advance to 110 per dollar in coming months.

Intervention Warning

The yen has climbed so much that Morgan Stanley, which predicted gains this year, is concerned policy makers will verbally intervene to weaken it.

The New York-based bank withdrew one of its trading recommendations after the yen approached its target of 114 per dollar. Investors should also take profit on positions betting on yen gains versus the pound, the bank’s strategists wrote in a note.

The premium for three-month options to buy the yen versus the greenback over contracts to sell has widened to 2.5 percentage points, the most since July 2010, risk-reversal prices compiled by Bloomberg show. The yen is the only G-10 currency on which traders are bullish versus the dollar, based on that metric.

Hedge funds and other large speculators betting on yen gains have outnumbered those expecting declines since the first week of this year, according to the Commodity Futures Trading Commission in Washington. So-called net longs reached the highest since February 2012 in the week of the BOJ rate decision, before being pared.

Kuroda’s next scheduled opportunity to change monetary policy isn’t until March 15.

“The central bank has no means to deal with the current situation in the near-term because the next BOJ meeting is in March,” said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Market risk aversion will prevail over the effects of monetary policy.”

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