Japanese Yen Back In Demand with Rise in Yields

How much will the Japanese currency rise now that the Bank of Japan has eased its yield curve control measures in a bullish move for the yen?

One of the major themes that affected the markets in 2021 was the (unwanted) rise in long-term yields in the United States. The move higher in the US Treasury yields triggered a tightening of financial conditions both in America and abroad.

The European Central Bank (ECB) was the first major central bank to voice concerns about unwanted tightening, but so did other central banks such as the Reserve Bank of Australia. In Japan, the move higher in American long-term yields triggered a bearish trend in the local currency.

The Bank of Japan Eases Pressure on the Yield Curve

One of the most interesting recent announcements was that the Bank of Japan is willing to let yields rise. More precisely, the bank announced late last year that it would widen the band around the zero level so that yields could rise more than before. Higher yields bode well for the currency, which is one positive for the Japanese yen.

Another positive is the recent policy adopted by the Government Pension Investment Fund (GPIF). This month it announced that it is planning to increase the allocation of foreign bonds and reduce the allocation of domestic bonds. The price of bonds will no longer be supported on dips, and higher yields will once again support the Japanese yen.

The problem is that the financial community views the Japanese yen as a safe-haven currency, so it often rises on threats to economic stability and systemic risks. Until this perception changes, the yen will have a hard time rising on internal fundamentals.

To exemplify, think of the recent move on the cryptocurrency market. During the weekend just gone, the main cryptocurrencies dropped by more than 15% in a move that scared investors in digital assets. The shock was so big that by the time the Forex market opened, safe-haven assets such as the Japanese yen and the Swiss franc were in strong demand.

However, this has nothing to do with the internal fundamentals of the yen, and it’s driven by how market participants perceive the yen in the international context.

To sum up, the Bank of Japan is willing to let the yen rise, but by how much remains to be seen.