Japan’s yen is a compelling trade but comes at a cost

SINGAPORE, July 4 ------ Global investors are unwinding their wagers on Japan's yen rising quickly as a cautious central bank, a trade war and the prohibitive cost of holding the currency sour one of the year's most popular trades.

Most analysts and real money investors remain convinced the yen will eventually appreciate as Japan shifts away from ultra-low rates. But pitted against this conviction are short term headwinds, including the lack of progress on a trade deal with the United States and uncertainty surrounding Japanese national elections.

Monetary policy has become the yen's biggest sticking point after the Bank of Japan (BOJ) has hinted it is loath to raise rates again this year, having done so in January, before it can gauge the full impact of U.S. President Donald Trump's sweeping tariffs.

James Athey, London-based fixed income manager at Marlborough, has reduced his long yen positions versus the dollar because he sees short-term positioning in the currency and the BOJ's "intransigence" as headwinds. "Ultimately we do still see numerous long-term tailwinds for the yen, it's just about managing the journey amongst this uncertainty and volatility," he said.

Investors still hold net long positions in the yen worth $11.41 billion, although that's drastically lower than the record $15.7 billion at the end of April, weekly data from the U.S. markets regulator showed. By virtue of low Japanese yields and huge offshore investments, the yen has historically been sensitive to overseas interest rates. The yawning gap between the U.S. and Japanese interest rates in the past few years had driven the yen to record lows, prompting costly interventions from Tokyo. That gap also makes owning the yen, whose bonds pay 0.5% on average, using U.S. dollars that cost upwards of 4%, an expensive proposition for investors. If the yen depreciates, it's a double-whammy.

Bo Zhuang, global macro strategist for Loomis Sayles, an affiliate of Natixis Investment Managers, said investors expected at the beginning of the year the long yen trade would work well over three to six months. "But now it's about 'oh well, maybe it will last more than that' and the cost of holding such a position might be too high for them to recover."

Source: reuters.com