A Stronger Yen Could Jolt Global Markets

• Investors are positioning for a regime change in global markets as the Bank of Japan (BOJ) edges closer to ditching the policies that depressed the yen for decades, thereby luring Japanese money back home.
• The BOJ, by flooding its financial system with cheap cash and keeping interest rates below zero for years, turned its currency into the ideal funding vehicle and sent trillions of dollars of Japanese cash overseas in search of better returns.
• It is now the last holdout in the global race to raise rates, but with Japanese inflation at multi-decade highs, the yen has steadily strengthened. That means portfolio managers are having to factor a stronger yen into global stock selection in a way they have not for years, with some even anticipating mergers and acquisitions as the Japanese market revs up.
• "The trigger for the revaluation of the Japanese markets is higher rates and then a stronger yen. It’s a market that has been undervalued for years and years and has been a value trap," said Carmignac's head of cross-asset Frederic Leroux.
• With Japanese inflation at its highest in four decades, excluding energy, the BOJ may consider ending its yield curve control (YCC) policy - through which it keeps long-term interest rates ultra-low by buying Japanese government bonds (JGBs) - sometime this year. "We are about to see a repatriation of assets back into Japan, and the numbers are really quite big," said Sam Perry, a senior investment manager at Pictet Asset Management. "This reversal could be really quite dramatic."

(Source: Reuters)