USD/JPY Fair Value Drops To 98.40 As Japan's Outflows Failing To Weaken JPY
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USDJPY again traded through 100 this morning as our STEER model signals the break can be sustained with fair value at 98.40.
Relative 10-year yields are currently the key driver of the pair. Weekly MoF portfolio flow data this morning continues to highlight that Japanese investor demand for foreign bonds is very strong, with net purchases last week of JPY 1.3trn following JPY 900bn the week before that.
The fact that these outflows are failing to weaken the JPY suggests that domestic Japanese currency hedge ratios have increased, as expectations around the success of Abenomics in weakening the JPY have continued to decline.
In April GPIF President announced of some hedging some of EUR and USD exposure. The potential magnitude of these flows is enormous - for every 1% of foreign currency risk the GPIF hedge, they need to buy approximately USD 5bn worth of JPY. And the GPIF are representative of broader Japanese institutional investor behaviour.