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Yen Bull Bets Rise as Japan Yields Beat U.S. After Inflation

  • Inflation-adjusted U.S. yields drop below those of Japan
  • BOJ policy ‘didn’t help boost inflation expectations:’ Mizuho

Bullish bets on the yen are building as real yields on Japan’s bonds beat those in the U.S. by the most in three years.

Inflation-adjusted yields on five-year U.S. Treasuries dropped to minus 0.57 percent last week, compared with the equivalent minus 0.48 percent for Japanese government bonds, the biggest discount since June 2013. The yen has gained 8.9 percent against the dollar since the end of March, when real yields in the U.S. fell below those in Japan for the first time since July 2013. 

Hedge fund wagers that the yen will gain are close to a record high and strategists have pared forecasts for declines in the past three weeks. That’s an ominous sign for Bank of Japan Governor Haruhiko Kuroda, whose adoption of negative interest rates in January helped fuel the yen’s rally. The BOJ’s latest strategy to manage the yield curve has failed to keep Japanese companies from trimming their forecasts for inflation. 

“The BOJ signaled it doesn’t want to deepen the negative rate and the decision didn’t help boost inflation expectations,” said Toru Suehiro, senior market economist at Mizuho Securities Co. in Tokyo. “If the difference in real interest rates with the U.S. slips, it puts pressure on the yen to strengthen.”  

The yen has surged 16 percent this year, the best performance among currencies of major developed economies, as the BOJ kept the total size of planned bond purchases unchanged and set a key rate below zero in January, spurring a flight to haven assets. It was at 103.37 per dollar as of 11:23 a.m. in Tokyo on Thursday.

Bullish bets on the yen by hedge funds and other large speculators exceeded those benefiting from losses by 68,892 contracts in the week ended Sept. 27, close to the record high of 71,870 contracts reached in April.

In the options market, it is more expensive to bet on yen advances against the dollar than declines, the only currency aside from the Swiss franc with that bullish indicator. The premium for three-month contracts to buy the Japanese currency versus the greenback over those to sell was at 1.2 percentage points, risk-reversal prices compiled by Bloomberg show.

Inflation expectations based on swaps are diverging in the U.S. and Japan as the Federal Reserve signals that it’s moving toward raising key rates this year, while the BOJ keeps them unchanged at minus 0.1 percent. At the BOJ’s policy meeting last month, Kuroda scrapped a two-year time frame for achieving 2 percent inflation, and instead said the central bank will aim to overshoot that goal. A core measure of consumer prices is falling at 0.5 percent, the same rate as the month before he launched his easing program in April 2013.

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“The overshoot commitment is for the BOJ to maintain an easy stance even after CPI reaches it target,” Mizuho’s Suehiro said. “It doesn’t deal with the current situation where CPI is failing to increase. Few sees prices picking up in five years, so it’s ineffective in bolstering inflation expectations.”

Minori Uchida, head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, said if inflation expectations don’t pick up in Japan, Japan’s real interest rate will likely remain elevated.

“The attempt in January was aimed at pushing down real rates but instead it made people more aware of the side-effects,” Uchida said. “That has helped lower expected inflation rate and raised real interest rates, leading to stock losses and yen appreciation.”

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