Japan’s yen at a 40-year low could become America’s bond-market problem
-
The drop in the Japanese yen to its lowest level in 40 years has increased the expectations for a new foreign exchange intervention.
-
The big question for Wall Street is whether Japan will be forced to sell U.S. Treasury bonds.
-
High yields in the US, the Iran war and current account transactions continue to put pressure on the Japanese currency.
japan new It has fallen to an almost 40-year low against the dollar, raising expectations that authorities could intervene to support the currency.
This possibility draws attention beyond the foreign exchange market because supporting the yen would require Japan to draw on its foreign exchange reserves, including a large portfolio of U.S. government bonds.
Japan is the largest foreign holder of U.S. Treasury securities; This means large-scale reserve sales could create volatility in the world’s largest bond market.
Early Wednesday, the yen was trading around 162.7 against the dollar; Investors continued to prefer the dollar due to the wide gap between US and Japanese interest rates.
The move comes even after Finance Minister Satsuki Katayama said on Tuesday that Japan was ready to take action against excessive currency movements. He said authorities would take “appropriate measures” on currencies when necessary.
If Japan steps into the market, investors will watch not only the yen but also the country’s dollar-denominated reserve assets, including the U.S. Treasury.
“When the BOJ sells currency, it is selling part of its securities book,” Chris Turner, ING’s head of global markets, wrote in a note.
Foreign exchange reserve data from Japan’s Ministry of Finance showed foreign securities holdings fell by nearly $75 billion in May; this likely reflected the sale of U.S. Treasury securities used for financing. previous efforts Turner added that they are spending money to support the yen.
With events this week potentially supporting the dollar, including comments from Fed Chairman Kevin Warsh on a panel on Wednesday and the June U.S. jobs report on Thursday, Turner said the U.S. Fourth of July holiday on Friday could provide a quieter window for any intervention.
Nigel Green, chief executive of financial advisory firm deVere Group, said investors should focus not on whether Japan intervened but on how it financed any intervention.
“If authorities are forced to increase support for the yen over an extended period, global investors could suddenly find themselves facing a completely different risk: One of the world’s largest foreign holders of U.S. Treasuries could become a more important seller,” Green said.
Yen under pressure
The yen is under pressure as US interest rates remain well above Japan’s. This encouraged investors to borrow cheaply in yen and invest in higher-yielding dollar assets; This strategy is known as carry trading.
