Yen Slump Is Exacerbated By Japanese Demand For Global Stocks

(Bloomberg) -- The yen is confounding expectations for a rally this year as Japanese appetite for global equities deepens a slump driven by higher US Treasury yields.

Analysts at Japan’s biggest brokerage, Nomura Holdings Inc., estimate that the expansion of the nation’s tax-free system for individual investors, known as NISA, could drag on the currency to the tune of five yen per dollar in 2024. Strategists at Mitsubishi UFJ Morgan Stanley Securities said the changes likely reduced the value of the yen by one per dollar in January. 

While forecasts compiled by Bloomberg show the currency should steadily appreciate through 2024, it has dropped about 6% versus the dollar since the start of the year. That’s when bets on near-term US interest-rate cuts started winding back, and changes to Nippon Individual Savings Accounts took effect. 

“More funds are flowing overseas than expected,” said Hideki Shibata, a senior rates and currencies strategist at Tokai Tokyo Research Institute. “We expect this trend to have a significant impact on the foreign exchange market.”

How long this downward pressure on the yen lasts is open for debate. Hedge funds and asset managers have in recent weeks added to positioning for a drop in the currency. Yet at the same time, the Bank of Japan appears on course to end its negative interest-rate policy in the coming months, and the Federal Reserve is still expected to cut borrowing costs this year — powerful reasons for the yen to eventually begin strengthening against the dollar.

Right now though, the recent jump higher in Treasury yields, and NISA, are having an impact.

Japanese investors bought a record ¥1.2 trillion ($8 billion) in overseas equities and investment trusts in January, when new rules removed time limits on tax benefits and allowed people to put more into the accounts.

While the amount of money pouring into NISA in February seems to be about half that seen last month, regular contributions could put a cap on potential future gains in the yen, according to Kenta Tadaide, chief FX strategist at Daiwa Securities Co.

To be sure, the expansion of NISA has not altered the underlying divergence in monetary policy that investors expect to see in 2024 between the Bank of Japan and its Group-of-10 peers. 

“If investors are already bearish the yen, the NISA story just is another reason to be negative,” said Lee Hardman, a senior currency analyst at MUFG Bank Ltd. “You wouldn’t say those flows on their own are enough to drive the yen weaker, but it’s certainly contributing.”

Bob Savage, head of markets strategy and insights at BNY Mellon Capital Markets, said the yen is undervalued, posing a risk for Japanese owning foreign shares without hedging.

The yen traded at 150.44 per dollar as of 8:26 a.m. in Tokyo on Thursday. The median of forecasts compiled by Bloomberg is for the yen to strengthen to 137 by the end of the year. 

--With assistance from Robert Fullem and Saburo Funabiki.

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