Yahoo Finance Vanguard Sees Yen Drop to 170 If BOJ Bond Policy Disappoints
(Bloomberg) -- Vanguard sees the yen at risk of falling toward 170 per dollar if potential Bank of Japan policy changes this month fail to boost the country’s bond yields.
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That would be the next big milestone for the currency after it slid through 161 in recent days, a level not seen since 1986. Its 13% drop this year is putting pressure on Japan to intervene to prop it up and for the BOJ to cut back vast government bond purchases that help keep monetary conditions loose.
Removing support for the bond market would drive up Japanese yields, making them more attractive and helping draw investment flows into the yen. While the BOJ has promised details on a plan to cut the 6 trillion yen ($37 billion) of monthly purchases at its July 31 meeting, a small reduction would only disappoint markets, said Ales Koutny, head of international rates at Vanguard, the world’s No. 2 asset manager.
“If at the July meeting they come down only to 5.5 trillion yen or even 5 trillion yen per month of JGB buying, markets may push dollar-yen again toward 170,” Koutny said in an interview at the London office of Vanguard, which has $1.7 trillion in actively managed funds. He’s joining a growing number of investors who expect the yen to fall to that level.
Traders are positioning for further declines in the yen over the next 12 months amid a sharp increase in demand over the last two weeks for call options to buy dollars and sell yen. Japan’s currency was at 161.65 as of 11.30 a.m. in London on Tuesday.
Read: Options Market Points to Another Year of Pain for the Yen
The yen is handicapped by the prospect of BOJ policy moves being gradual, which is keeping the country’s bond yields well below other markets. Yields have risen this year following an interest-rate hike, taking 10-year rates up about 40 basis points to above 1%, but US and German yields have seen even bigger increases.
This is raising the stakes for the BOJ’s next meeting, says Koutny, who reckons the central bank should act aggressively by reducing bond purchases and hiking rates again. But only one-in-three economists surveyed by Bloomberg are expecting simultaneous action.
“If they disappoint on any of these two fronts, there is only one direction the dollar-yen is going to go,” he said.
A flip in policy to tapering Japanese bond purchases could have a far greater ripple effect than in Europe or the US, where it’s gone largely under the radar, according to Koutny.
That’s because the BOJ owns about half of Japan’s outstanding public debt with holdings of around 584 trillion yen, so its retreat will likely drive up yields as price-sensitive buyers step in. Koutny says the 10-year yield could reach at least 1.50%, from around 1.09% now.
“I think we may be surprised about how impactful it can be, but more importantly, that could be actually what supports the yen eventually,” he said. “We think eventually JGBs are going to be a great buy.”
As investors wait for a BOJ policy shift, a more immediate concern is the prospect of intervention as the yen continues to fall.
A repeat of Japan’s massive yen buying spree in late April will do little to slow the currency’s tumble, Koutny thinks, as the bar for success becomes higher if that’s not backed up by tightening measures. Under such circumstances, he would continue to scoop up dollar-yen after bouts of intervention.
“If we see intervention that’s not accompanied by significant rate hikes or the promise of rate hikes and quantitative tightening, that is just a buying opportunity for us,” he said.
(Updates prices throughout.)
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