Global Fixed Income Strategy – Monthly Update
Global macro strategy
Can Japan reverse the yen’s decline?
Key takeaways
• Recent yen weakness has prompted one of the largest coordinated currency interventions in more than a decade. But despite its scale, intervention alone may not change the yen’s trajectory.
• While policymakers have shown willingness to defend the currency, we believe the yen’s path will depend on macro factors, such as risk sentiment, global growth expectations and interest rate differentials and the willingness of the Bank of Japan to accelerate its hiking cycle at the upcoming September meeting.
• The yen has also been weighed down by a perception that Japanese monetary and fiscal policy are incoherent, with some fearing fiscal dominance, as the government discourages monetary tightening to support on-going spending. Reaffirming the BoJ’s independence and reinforcing Japan’s fiscal credibility would likely build investor confidence, supporting the yen over the long term.
A historic intervention
Japan recently conducted its largest currency intervention since 2011, with the Ministry of Finance alongside the US Treasury reportedly selling billions of US dollars and euros against the yen. The intervention was notable both for its scale and for the fact that it was coordinated with the US authorities, a rarity outside periods of market stress and the first such joint effort since the aftermath of Japan’s 2011 earthquake.
The initial market reaction appeared encouraging. The yen strengthened against the US dollar and the euro. However, the move quickly lost momentum, with much of the gains subsequently retraced.
For investors, this pattern highlighted a familiar reality: intervention can affect the exchange rate in the short run, but it is far less effective at altering underlying market trends. The partial reversal served as a reminder that even exceptionally large interventions struggle to overcome the macroeconomic forces driving capital flows and investor behavior.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Non-investment grade bonds, also called high yield bonds or junk bonds, pay higher yields but also carry more risk and a lower credit rating than an investment grade bond.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
