By Nell Mackenzie
LONDON (Reuters) – Pressure on Japan to sustain a weak yen may have ebbed, but currency weakness remains a headache for Tokyo.
The yen is down 9.4% against the dollar so far this year, and appears to be in its fourth year of decline. This has created a two-speed economy, with exports and tourism benefiting from a more competitive exchange rate, while households and small businesses are under pressure from rising import prices.
Four investment managers shared four ideas on how to deal with the yen’s weakness. Their views do not represent recommendations or trading positions, which they cannot disclose for regulatory reasons.
1/ FLORIN CAPITAL
* Diversified systematic asset manager
* Size: $2 billion in assets under management (AUM)
* Founded in 2016
* Main trade: Short Asian currencies ex-Japan
Florin Court CIO Doug Greenig says that instead of playing on a weak yen, investors should bet on Asia’s emerging market currencies.
“Investors may want to consider shorting other Asian currencies, such as the Korean Won or the Thai Baht, where real interest rates are also relatively low versus some other emerging market currencies,” Court said. “And you don’t immediately run the risk of BOJ intervention.”
The Bank of Japan (BOJ) was believed to have intervened twice, on April 29 and May 1, to stabilize a yen that had fallen to a 34-year low around 160 per dollar. It is now around 155.6.
The yen has weakened sharply for obvious reasons: real interest rates are much higher outside Japan.
US interest rates have been kept high thanks to accommodative fiscal policy and a robust economy. Japan, on the other hand, does not have a free hand in raising policy rates, Greenig said.
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Japan’s massive public debt stands at 263% of GDP, but the Bank of Japan owns almost half of that, so the situation could be more nuanced than it seems, he said.
2/ AQR CAPITAL MANAGEMENT
* Systematic asset manager
* Size: $108 billion
* Founded in 1998
*Long Japanese stocks
Jonathan Fader, managing director of the Macro Strategies Group at AQR Capital Management, says the BOJ’s intervention complicates matters for the yen bear, but the main driver of the yen’s weakness remains: Japan’s accommodative monetary policy, while interest rates elsewhere are at their highest level in several years.
He favors Japanese stocks that benefit from currency weakness.
Fader noted that the close relationship between the yen and Japanese stocks was broken as Tokyo stepped up verbal intervention. But equity tailwinds persisted, such as improvements in governance and banks benefiting from the end of negative rates.
The BOJ made its first rate hike in 17 years in March.
“Should yen volatility decline, Japanese stocks could resume their outperformance,” Fader said.
Japan’s blue chip is above record highs from earlier this year, but is still up about 16% this year.
3/ CONFIRM LUCAS MANAGEMENT
* Macroeconomic hedge fund
* Size: $1.5 billion
* Founded in 1986
* Dollar/yen forward
For David Aspell, partner at Mount Lucas, a large interest rate differential between the US and Japan means investors will continue to use the yen as a funding currency for carry trades.
One way to capitalize on the yen’s weakness is through forward currency contracts, contracts that allow investors to hedge currency risk, he said.
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Buying a one-year dollar/yen futures contract, which is trading at a discount to current levels, means the currency pair would have to weaken in a year to lose money, Aspell said. Investors would benefit if there is no change or the dollar/yen strengthens.
“Intervention has the best chance of working in the medium term if it is a real surprise and is helped by the fundamentals,” Aspell said.
4/ PINEBRIDGE INVESTMENTS
* Global asset manager
* Size: $168.2 billion
*Independent since 2010
* Buy high-quality, short-term, investment-grade portions of refinanced 2024 US CLOs
The BOJ has also given up yield curve control, capping long-term yields near zero, but said it would continue to buy government bonds broadly as before and step up purchases if yields rise quickly.
Since the start of this policy in 2016, Japanese investors have sought higher-yielding investments elsewhere. The plus 5% interest on investment grade tranches (parts) of American collateralized loan bonds (CLOs) attracted many visitors.
“Right now, as investors in CLOs, they are our competition because they have such strong demand for U.S. fixed income assets,” said Laila Kollmorgen, director of PineBridge, adding that what Japanese investors do will determine how Pinebridge invests later this year .
With Japanese government bond yields hitting a decade high, this could tempt Japanese investors to move their money back home.
“We have to remain agile,” says Kollmorgen.
Although the typical duration of a CLO deal is eight years, she would opt for new CLOs in 2024. The deal time has therefore restarted. She will look for an extended three-year reinvestment period, refinanced debt and lender protection against the bonds being fully repaid in the first year.
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