Japan’s central bank is in a difficult situation after the yen went down on Monday and government bond yields rose. The currency fell more than 2% against the dollar to reach a 7-year low of ¥ 125. The next four days were followed by unrestrained buying of bonds by the Central Bank in an attempt to stop the “bleeding” and reduce interest rates.
Large yen movements are rare
Traders pay attention when the currency starts to move, and in this case it is the third most traded currency, which participates in transactions worth trillions of dollars. Hedge funds are trying to take advantage of interest rate differentials around the world by borrowing in “cheap” currencies (such as the yen) and investing in bonds in higher-income countries – the so-called “portable” trade. For example, if 10-year Australian bonds yield 5%, while similar Japanese bonds yield almost nothing, investors can sell the yen, buy the Australian dollar and use the proceeds to buy Australian bonds.
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Difficult decisions
So when the yen starts to make big moves up or down, traders face strategic dilemmas.
Because the yen is used as a cheap source of money to leverage “portable” trade, it is a risky bet, said John Outers of Bloomberg, quoted by Yahoo Finance.
Although the yen and Japanese bond markets have cooled so far, the central bank will have to make an important decision. Additional pressure could prompt Japanese authorities to intervene in the yen. Japan has a long and legendary history of gradually strategically weakening the yen in order to favor exports. But this will be the first time since 1998 that the bank will intervene to strengthen the currency.
