Nell Mackenzie
LONDON (Reuters) – Pressure on Japan to support a weak yen may have eased, but the currency’s weakness remains a headache for Tokyo.
The yen has fallen 9.4% against the dollar this year and looks set for a fourth year of declines. This has created a two-speed economy: exports and tourism benefit from a more competitive exchange rate, while households and small businesses suffer from rising import prices.
Four investment managers shared four ideas on how to trade yen weakness. Their opinions do not constitute recommendations or trading positions that they are unable to disclose for regulatory reasons.
1/ CAPITAL OF THE FLORIN COURT
* Diversified systemic asset manager
*Size: $2 billion in assets under management (AUM).
*Founded in 2016.
* Main trade: short positions in Asian currencies excluding Japan.
Florin Court CIO Doug Greenig says that instead of betting on a weak yen, investors should bet against emerging market currencies in Asia.
“Investors may want to consider selling other Asian currencies such as the Korean won or Thai baht, where real interest rates are also relatively low compared to some other emerging market currencies,” Court said. “And you don’t directly face the risk of BOJ intervention.”
The Bank of Japan (BOJ) was thought to have intervened twice, on April 29 and May 1, to stabilize the yen, which had fallen to a 34-year low of around 160 to the dollar. Now it’s about 155.6.
The yen has weakened sharply for obvious reasons: real interest rates are much higher outside Japan.
Rates in the US are being held high by accommodative fiscal policy and a resilient economy. By contrast, Japan has no discretion to raise interest rates, Greenig said.
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Japan’s huge pile of government debt amounts to 263% of GDP, but the Bank of Japan owns nearly half that amount, so the situation may be more complex than it seems, he said.
2/ AQR CAPITAL MANAGEMENT
* Systematic asset manager
* Size: $108 billion.
* Founded in 1998.
* Long positions in Japanese stocks.
Jonathan Fader, managing director of the macro strategy group at AQR Capital Management, says the Bank of Japan’s intervention is complicating the situation for yen bears, but a key factor in the yen’s weakness remains Japan’s accommodative monetary policy while rates elsewhere are at multi-year highs .
He favors Japanese stocks, which benefit from currency weakness.
Fader noted that the close relationship between the yen and Japanese stocks broke down as Tokyo stepped up its verbal intervention. But equity market tailwinds remained, such as improved governance and banks benefiting from the end of negative rates.
In March, the Bank of Japan carried out its first rate hike in 17 years.
“If yen volatility calms down, Japanese stocks may well resume their momentum,” Fader said.
Japanese blue chips are off the record highs reached earlier this year but are still up about 16% year to date.
3/ MOUNT LUCAS MANAGEMENT
* Macroeconomic hedge fund.
* Size: $1.5 billion.
* Founded in 1986.
* Forward dollar/yen rate.
The wide gap between US and Japanese exchange rates means investors will continue to use the yen as a funding currency for carry trades, according to David Aspell, a partner at Mount Lucas.
According to him, one way to play on the weakness of the yen is through currency forwards, contracts that allow investors to hedge currency risks.
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Buying a one-year dollar/yen forward contract that is trading at a discount to current levels means the currency pair would have to weaken over the course of the year to lose money, Aspell said. Investors will benefit if there is no change or if the dollar/yen strengthens.
“An intervention has its best chance of success over the medium term when it is a genuine surprise and when it is supported by fundamental factors,” Aspell said.
4/ INVESTMENT IN PINEBRIDGE
* Global asset manager
*Size: $168.2 billion.
* Independent since 2010.
* Buy high-quality, investment-grade shares in short terms, refinanced 2024 US CLOs.
The Bank of Japan also gave up yield curve control, capping long-term interest rates near zero, but said it would continue to buy government bonds broadly as before and increase purchases if yields rise quickly.
Since the policy began in 2016, Japanese investors have sought higher-yielding investments elsewhere. The plus 5% yield on tranches (portions) of investment grade U.S. Collateralized Loans (CLOs) has attracted many.
“Right now, as CLO investors, they are our competitors because they have very high demand for fixed income assets in the US,” Leila Kollmorgen, managing director of PineBridge, adding that the way Japanese investors will invest will be determine how Pinebridge will invest later this year.
Now that JGB yields are at their highest in a decade, this could prompt Japanese investors to bring funds home.
“We have to stay nimble,” says Kollmorgen.
While the typical length of a CLO deal is eight years, she would prefer to reset the CLO again in 2024. In this case, the transaction period will be restarted. She will seek an extension of the three-year reinvestment period, refinancing the debt and protecting creditors from paying off the bonds in full within the first year.
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