Analysis-Bank of Japan's opaque policy shift means stronger, wilder yen
By Naomi Rovnick, Alun John and Ankur Banerjee
LONDON/SINGAPORE (Reuters) — The Japanese yen is on a bumpy path towards strengthening after Friday's central bank policy change, threatening to upend the carry trade, one of this year's most popular strategies, as the currency inevitably becomes more expensive.
The BOJ kept its short-term interest rate target below zero, but shook markets by adjusting a policy that had effectively capped the 10-year government bond yield at 0.5%.
The wild swings in the yen, which saw its most volatile trading day for months, reflect the initial confusion among traders and investors about what this might mean.
But two things are already clear: trading in the yen will be choppy, and have a knock-on impact on markets beyond Japan.
A rocketing yen has major implications for risk assets that have been at least in part supported by the trillions of dollars in global liquidity the BOJ has effectively exported.
In what is known as a carry trade, investors have borrowed cheaply in yen to fund bets in higher-yielding currencies like the dollar or the Mexican peso, making money on the difference.
«All these markets are linked together in terms of global liquidity flows. People borrow in yen to buy dollars, dollars sit around looking for something to do, people say we might buy Treasuries or Apple (NASDAQ:AAPL),» Simon Edelsten, global equities fund manager at Artemis, said.
«All this liquidity creation out of cheap Japanese money feeds into risk assets — at the margin, but enough to move prices.»
In a sign of what might be to come, on Friday the yen strengthened by as much as 1.2% on the day against the dollar, then weakened 1%, before settling not far from flat around 139 per dollar.
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