Following Japan's intervention to strengthen the yen, investors have significantly increased their purchases of foreign equities and long-term bonds, net buying over 5 trillion yen in just two weeks. This shift indicates that investors are leveraging the yen's temporary strength to acquire overseas assets at better rates.
Jesper Koll from Monex Group noted that the intervention has effectively 'turbo charged' the carry trade, as the low cost of borrowing in Japan continues to incentivize investments in higher-yielding foreign assets.
Despite the yen's initial rally from around 164 to 155 per dollar, it has since weakened back toward 159, suggesting that the intervention did not resolve the underlying issues of Japan's low interest rates and the significant yield gap with the U.S., which stood at approximately 1.8 percentage points.
Analysts like Francis Tan from Indosuez Wealth Management argue that the intervention only addressed a symptom rather than the root cause of the yen's weakness. Institutional investors are still favoring carry trades, selling yen to invest in higher-yielding currencies, particularly against the Australian dollar.
Additionally, some currency traders are re-establishing bearish positions on the yen, anticipating further weakness. Overall, while speculative short positions against the yen have decreased, the fundamental pressures from Japan's low interest rates persist, keeping the currency under pressure and maintaining the attractiveness of carry trades