Japanese Yen: Homeward investment shift could support recovery – MUFG

MUFG’s Derek Halpenny highlights that the Japanese Yen (JPY) remains near cyclical lows, but Government Pension Investment Fund (GPIF) and Japan Trusts flows already show a shift back toward JGBs. He argues that formalising the end of Abenomics-style risk-taking marks a turning point, with domestic bond allocations rising and potential further JGB buying that could ultimately support the Yen as Bank of Japan (BoJ) policy normalises.

GPIF flows point to rising JGB demand

"The yen remains close to cyclical lows and the US data yesterday along with the risk of further crude oil price rises are curtailing the appetite to sell the US dollar following the weak CPI and PPI reports. We would still argue that the lack of price action in the yen should not be viewed as the government’s push to encourage greater investment in domestic assets not being significant. We would still argue that it marks a notable turning point from the Abenomics era that encouraged investments in risker assets to boost returns – for pensions this would help restore confidence in Japan’s pension system and in turn reduce cautionary savings."

"The GPIF domestic bond composition has gone from 23.9% at the end of FY2019 (as of March 2020) to the current 26.9%. Based on the GPIF composition falling ahead of the formal reduction in 2020 from 35% to 25%, we could well see stronger demand for JGBs continuing with the potential of reaching 31% (+6% from 25% benchmark). From this latest total, even holding the value of the fund constant, a move to 31% would imply potentially an additional JPY 12trn worth of JGB buying, but more if the total fund continues to grow."

"Policy will only take you so far though and the BoJ still needs to play its role in encourage greater investments at home. The government this week added a footnote to its Economic and Fiscal Policy Plan underlining the autonomy of the BoJ as laid out in the BoJ Act. The government is now being pro-active in countering the perception of PM Takaichi pushing back on BoJ rate hikes."

"The BoJ now needs to show it is not constrained by the government and hiking in September would be the best way to do that and would go some way to helping turn the yen stronger."