Japan's Currency Intervention Accelerates Overseas Asset Purchases
Tokyo's recent efforts to support the local currency inadvertently provided investors with a favorable exchange rate to massively increase their purchases of foreign equities and bonds.
Japanese investors purchased more than 5 trillion yen of foreign equities and long-term bonds in the two weeks ending August 15. This marks a sharp reversal from the prior fortnight, which saw net selling exceeding 300 billion yen, according to Ministry of Finance data.
Market watchers attribute this surge to the sharp yen rally that followed last month's joint U.S.-Japan currency intervention. The local currency strengthened from near 164 per dollar to roughly 155 before sliding back toward 159. Investors utilized this temporary strength to acquire overseas assets at better exchange rates.
The dynamic highlights a persistent structural issue rather than a resolved one. Authorities managed to jolt the currency higher temporarily but failed to eliminate the fundamental incentive to borrow cheaply in Japan and invest in higher-yielding foreign assets.
"Intervention has 'turbo charged' the carry trade for fundamental & long term investors," noted Jesper Koll, expert director at Monex Group. He added that carry trades will re-assert as long as domestic borrowing costs remain below overseas returns.
The yen is expected to stay under pressure unless the Bank of Japan raises interest rates sufficiently to narrow the bond yield gap with the United States. As of Thursday, the 10-year yield spread between the two nations stood at approximately 1.8 percentage points.
Francis Tan, Asia chief strategist at Indosuez Wealth Management, argued that the action only addressed a symptom. He stated it failed to cure the underlying disease of low borrowing costs and wide rate differentials.
This structural reality is evident in the behavior of domestic institutional investors. Masahiko Loo, a fixed income strategist at State Street Global Advisors, observed that long-term investors such as pension funds and asset managers continued selling the local currency.
"The market is far less one-sided than before the intervention, but the incentives to fund in yen remain attractive while U.S.-Japan rate differentials stay wide," Loo stated. He noted that long-term investors are consistently selling the low-yielding currency against higher-yielding G10 alternatives.
Koll also pointed out that retail and institutional participants used the stronger currency to build new positions in non-yen assets, particularly higher-yielding U.S. bills and bonds. Alpha Binwani Capital founder Ashwin Binwani added that institutions remain positioned in carry trades against a G10 basket led by the Australian dollar.
Speculative traders are similarly rebuilding bearish bets as the intervention's impact fades. Binwani exited long dollar-yen positions immediately after the U.S.-backed action but re-established them just above 157.
"Upon news of the U.S. intervention, we took profit and once again re-established dollar yen long positions just slightly above 157," Binwani explained. He suggested that each intervention-driven rally simply provides a superior entry point to sell the currency.
Despite these rebuilding efforts, overall speculative positioning against the currency has declined. CFTC data indicates that leveraged funds reduced their net short positions from nearly 138,000 contracts at the end of June to 59,526 by August 11.
