Rate checks by the Bank of Japan and the Federal Reserve last week suggest that a broader intervention to prop up the yen and longer-term U.S. Treasury yields is imminent.
Japan’s wage and inflation dynamics are the primary motivation behind the intervention as the Bank of Japan moves at a glacial pace to normalize monetary policy.
What’s more, and not to be underestimated, fixed income investors could push back against changes in fiscal policy that may follow the Feb. 8 snap election called by the Japanese government.
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On the American side, a move to prop up the yen can best be understood as modest element of risk management given the strong relationship between a weaker yen and rising long-term U.S. yields.
Source: Bloomberg
For a more in-depth quantitative look here is the data from Bloomberg on the relationship between the yen and the 10-year Treasury yield over the past five years. It gives one a sense why capital markets professionals pay such close attention to the relationship between the yen and central bank policy.
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