Further changes to its yield curve control (YCC) policy could bring more Japanese money back home
Further changes to the Bank of Japan’s yield curve control policy could bring more Japanese money back home, against a backdrop of rising hedging costs that are already weighing on domestic investors’ demand for overseas bonds.
Around half of that is in U.S. assets such as Treasuries, agency debt and corporate bonds, and around a third in euro zone securities. Unloading even a fraction of them could have a discernible impact on flows, prices and yields. Wholesale liquidation of Japanese investors’ foreign bond holdings is unlikely barring a “very substantial” rise in Japanese yields from here. The reality may be less eye-catching, but no less powerful over the long term.
Currency hedging is done through FX and interest rate derivatives markets, and generally boils down to borrowing on a short-term basis to buy longer-dated securities. For unhedged investors, recent exchange rate moves and volatility have been most unwelcome. The yen has surged almost 20% against the dollar since hitting a 30-year low in October, propelled by the BOJ’s YCC move and three bouts of yen-buying intervention in September and October worth $60 billion.
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