Japan Notes: A Rebound In Sight?

It has been quite a week in the Japanese equity markets with the Nikkei seeing spectacular moves challenging the 14,000 level. As I write this now, Nikkei futures just broke below the 14000 level to 13820 (-1000)1 after the regular Japan session closed off of the lows of the session.

Currency Snapshot

Cumulative Return 18% 15% 10% 10%



Out of this small sample of the major pairs, the USD has been leading in terms of strength against the Yen followed closely by the Euro and Pound. A picture is worth a thousand words; here’s the returns for YTD 2013:

JPY Cumulative Return


I seem to recall in a not too far distant time, the Japanese finance minister saying that the Yen was too strong and that they were going to do everything in their power to weaken it to a reasonable level. Perhaps you remember those times also when the BoJ came into the market and defended the upper 70’s level and then ultimately gave up. Well, now we have a new sheriff in town in Japan and one has to wonder if the Yen is weakening too fast for its own good?

Since 2012, the Yen has weakened 31.9% against the USD, 33.5% against the Euro, 30.1% & 23.4% against the Pound and Aussie respectively. Now, with the Nikkei in a slide down below 14,000 one has to wonder if perhaps there is a short term sacrifice to equity earnings in favor of supporting the currency and bond markets.

JGB Snapshot

The past week has brought about some interesting comments from BoJ Governor Kuroda regarding the JGB market and I’ve made some interesting off the cuff observations on Twitter regarding this. They are embarking on a path of “clear communication” with the markets about their monetary policy operations and they are largely expected to stay the course (much like our own Fed). The one thing that people are going to be looking for in the coming weeks is what will the BoJ do if yields begin to spike, especially in the longer end of the curve.

The most recent 40Y JGB auction actually saw a drop in average yields, but there are mixed signals being sent with regards to the front end of the curve. The 2Y JGB auctioned on April 25 saw a avg yield of 0.13pc vs. the prior avg of 0.06pc while the 5Y auctioned on May 16 saw a increase to 0.40pc from 0.27pc. Further along the curve there are mixed results: the 20Y JGB auctioned on April 18 saw a drop in yield of 10bps from 1.62pc to 1.52pc while the 30Y JGB auctioned on May 14 saw an increase of 28bps to 1.77pc from 1.49pc.

The key auctions to watch given the recent overall market volatility in Japan will be the 20 Year auction on May 28, followed by the 2 Year on May 30. It’s worth noting that the most recent (May 21) 40Y JGB auction actually saw yields drop 16bps to 1.96pc from 2.12pc while the coupon fell 10bps to 1.90pc from 2pc. You can view the full JGB auction calendar and previous auction results. Despite the BoJ stepping into the market and buying bonds, 10Y yields continued to trade higher. It will be interesting to see what shape the curve continues to take moving forward.

1: It has been a pretty volatile session to the downside in Nikkei futures after the European open and I’ve had to revise that price at least 5 times while writing this.