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24 Feb 2015
Higher JGB yields might weaken JPY directly – RBS
FXStreet (Barcelona) - Greg Gibbs, FX Trading Strategist, explains that higher JGB yields generated by institutional outflow would be positive for Japanese equities, thus weakening JPY directly and even increase higher inflation expectations.
Key Quotes
“JGBs have certainly become more volatile since the BoJ stepped up its QE on 31-October 2014. Firstly yields fell sharply through to mid-January, since then they have rebounded significantly, retracing much of the earlier fall. Much of these moves mirror yield moves in the US and a range of global factors.”
“Nevertheless, JGB yields are not as stable as might have been expected if they had just been influenced by more purchases by the BoJ.”
“Higher JGB yields generated by more sales by GPIF, Japan Post or other Japanese investors, may generate demand for Japanese equities and foreign equities that might weaken JPY directly and indirectly by also generating higher inflation expectations (and lower real yields).”
“If higher Japanese yields reflect this kind of institutional outflow from JGBs, then it might be consistent with a weaker JPY. However, higher yields in Japan may also tend to support inflows to JGBs or discourage outflows and then lessen the weakening impact on JPY.”
“But if yields in Japan were to rise too much, such that it tended to cause negative feedback to Japanese equities and positive feedback to JPY, the BoJ could choose to further expand its QE and keep them down. This in turn would tend to weaken the JPY again.”
Key Quotes
“JGBs have certainly become more volatile since the BoJ stepped up its QE on 31-October 2014. Firstly yields fell sharply through to mid-January, since then they have rebounded significantly, retracing much of the earlier fall. Much of these moves mirror yield moves in the US and a range of global factors.”
“Nevertheless, JGB yields are not as stable as might have been expected if they had just been influenced by more purchases by the BoJ.”
“Higher JGB yields generated by more sales by GPIF, Japan Post or other Japanese investors, may generate demand for Japanese equities and foreign equities that might weaken JPY directly and indirectly by also generating higher inflation expectations (and lower real yields).”
“If higher Japanese yields reflect this kind of institutional outflow from JGBs, then it might be consistent with a weaker JPY. However, higher yields in Japan may also tend to support inflows to JGBs or discourage outflows and then lessen the weakening impact on JPY.”
“But if yields in Japan were to rise too much, such that it tended to cause negative feedback to Japanese equities and positive feedback to JPY, the BoJ could choose to further expand its QE and keep them down. This in turn would tend to weaken the JPY again.”