BNY’s Bob Savage notes that Japanese equities have reclaimed record highs, but international allocations to Japan and Japanese Yen (JPY) hedges have not fully normalized. JPY remains pressured by persistent foreign hedging and limited Japanese outflows. Savage argues that potential Ministry of Finance (MoF) intervention will be less effective until hedges unwind, leaving Bank of Japan (BoJ) rate hike expectations as a key driver for the US Dollar (USD) and Japanese Yen in coming weeks.

Hedge overhang tempers intervention impact

"The Japanese Nikkei share index has rallied to set a new record highs, erasing all the losses from the Iran war. However, our holdings data suggest that investors are not back to February highs. International investors’ asset allocation to Japan was close to the MSCI ACWI index before the conflict, but not today."

"JPY holdings mostly reflect the hedging of Japan investments abroad. The FX positions are balanced against foreign hedging, which our data show restarted in the last week of March. The holdings figures suggest Japanese outflows into the U.S. and other markets have not been as large as the inflows, adding to pressure on JPY."

"The risk of intervention by Japan’s finance minister will have less effect until those hedges unwind – with the basis trade in JGBs against U.S. bonds part of the narrative. As such, BoJ rate hike risk should be a key factor for the weeks ahead in setting the course for the dollar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)