Yen Regains Most of BOJ Slide as Japan Yield Drops to G-7 Record

  • Japan's currency rallies against most peers as stocks fall
  • Risk aversion is `overriding short-term catalyst' for yen: IG

Negative Japanese policy rates have pushed the yield on the nation’s benchmark bond to the lowest among the Group-of-Seven economies, but it’s not working its magic on the yen, which is rallying as investors seek safer assets amid a renewed selloff in stocks.

The Asian currency has retraced more than half of its drop on Jan. 29, triggered when Bank of Japan Governor Haruhiko Kuroda unexpectedly adopted negative interest rates. Paying no heed to rock-bottom government bond yields, investors are buying the yen and dumping Japanese stocks in an extension of the classic risk-off trade that has dominated 2016.

“The reaction we saw at the end of last week due to the decision of the Bank
of Japan was somewhat exaggerated,” said Soeren Hettler, a senior foreign-
exchange analyst at DZ Bank AG. in Frankfurt. “Today, it’s really a question of risk-aversion. The yen is the only really traditional safe haven we have at the moment in currency markets.”

The yen gained 0.4 percent to 119.54 per dollar as of 7:35 a.m. in New York. It has advanced more than 1 percent this week after the BOJ’s announcement drove a 1.9 percent drop on Friday, its biggest in more than a year. Japan’s currency strengthened 0.3 percent to 130.56 to the euro, which was itself little changed at $1.0923.

Japan’s two- and 10-year bond yields dropped to records and Asian equity markets sank for a second day. The yield on the 10-year bond fell to as low as 0.045 percent. Germany’s 10-year yield reached 0.049 percent in April, the previous nadir for a G-7 nation. U.S. 10-year yields dropped to as low as 1.83 percent Wednesday as traders cut their forecasts for how much the Federal Reserve will raise interest rates.

The MSCI All-Country World Index of developed and emerging markets has already fallen almost 8 percent this year, and dropped 0.4 percent Wednesday. The Topix index of Japanese shares slid 3.2 percent as investor jitters about the pace of global economic growth wiped out most of the gains from a short-lived rally in the wake of the BOJ decision.

Japan’s currency climbed against 11 of its 16 major peers Wednesday, with the biggest gains coming versus the South Korean won and Taiwanese dollar.

“With the world in simultaneous disinflation and the U.S.’s rate hikes becoming difficult, the spread between the U.S. and Japan is unlikely to widen easily,” said Minori Uchida, head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. “In that situation, it will be hard for the yen to weaken against the dollar on a sustainable basis.”

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