Japan: Domestic drivers for JPY remain positive – RBC CM

Research Team at RBC Capital Markets notes that the USD/JPY is more leveraged than any other major currency pair to movements in US rate expectations and has also reverted to trading as a strong proxy for general risk appetite.

Key Quotes

“The domestic drivers for JPY remain, in our view, JPY positive. Although higher US rates (our economists forecast two hikes in 2017) will push up the cost of hedging overseas investment for JPY-based investors, the substantial steepening of the US curve means that new investment in hedged USTs is becoming more, not less, attractive. Moreover, Japan’s existing holdings of foreign bonds yield significantly more than current market rates, and putting hedges back onto existing bond holdings after five years of consistent falls in hedge ratios will still make sense, even with US short rates at 1.5%. During 2017, the domestic policy debate in Japan is increasingly likely to turn to tapering the QQE programme as potential conflicts between targeting the quantity of money (QQE) and the BoJ’s 10yr yield target grow.”