We have shifted to a modest long position in the Japanese yen against the euro in our multi-asset portfolios. The trade should benefit from yen weakening after the Bank of Japan dashed market pressure for higher interest rates. With EUR/JPY now trading at the top of its range over recent years, we see the yen as attractively valued from a longer-term perspective.
The euro by contrast appears to be well priced for what we see as an unrealistically positive scenario this year (one of ultimate economic stability rather than recession and a problem-free resolution of the energy crisis, even as the war in Ukraine continues). The market also appears to have become more optimistic on the euro, foreseeing less of a need for higher official rates to fight inflation.
We expect the market to test the BoJ again on its policy of maintaining a cap on 10-year bond yields, even as inflation in Japan is rising. We expect a shift to a more hawkish stance, which should benefit the yen. Being long JPY vs. the EUR can also be seen as an opportunistic hedge.
BoJ maintains yield cap
At its 18 January policy meeting, the BoJ resisted market pressure and left its yield curve control (YCC) measures intact, weakening the yen and pushing Japanese stocks higher. There had been calls for the BoJ to end a two-decade experiment in massive monetary easing. The decision followed weeks of turmoil in the Japanese government bond market during which yields have surged.
In December, the BoJ unexpectedly decided to allow a higher target yield ceiling on 10-year government debt — permitting yields to fluctuate by a wider 0.5% above or below its target of 0%. Ending the cap on yields in effect pushes up interest rates.
Since the December policy meeting, 10-year government bond yields have risen to above 0.5%. This has prompted markets to pressure the central bank to drop the yield target altogether.
Asset class views
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.