Macroscope | Why the Japanese yen’s prospects continue to be rosy and there is little policymakers can do about it
- Neal Kimberley says worries about the US-China trade war are fuelling demand for the yen, strengthening the currency to Japanese exporters’ dismay
- Meanwhile, China’s looser monetary policy at a time when other central banks are tightening their belts underpins the drop in the yuan’s value
Failure to incorporate a currency hedge would leave a Japanese investor exposed if the yen then rose against the US dollar. The benefits in yen terms of locking into a higher US yield would be eroded, or even cancelled out, by the fall in the greenback’s value.
Of course, a Japanese investor could seek to hedge such a currency risk but, as Mitsubishi UFJ Morgan Stanley Securities (MUMSS) pointed out last week, those hedging costs have surged recently, “reflecting even greater demand for [US] dollars”. “Towards the end of September, costs had surged above 3 per cent … At this level, a currency-hedged investment in US bonds could hardly be considered enticing,” MUMSS wrote. “Although long-term US Treasury yields have topped 3 per cent, after hedging costs are deducted they are effectively on a par with (or even lower than) yields on long-term Japanese government bonds.”
