Transcription
In October, we saw intervention in the yen's value, including interest rate hikes. This will lead to the unwinding of yen carry trades. There's a chance of a "triple sell-off," meaning the yen strengthens, the Japanese stock market potentially declines, and bond yields rise while prices fall.
The US economy is weak, bond yields are low, and there's a surprise interest rate hike. Currently, the market does not anticipate a hike in October; most expect it in December. I believe that various economic conditions, leading to the unwinding of yen carry trades, have a chance of occurring this quarter.
Last time the BOJ raised interest rates, it shook the market. In 2024, we saw Japanese stocks fall 12%. Do you think this time will be as scary as the last time?
I think people will be surprised, more or less, because the cash on hand might be low. Secondly, if we look at the flows, at the end of Q2 and the beginning of Q3, investors started to reduce their risk positions and opted for defensive assets, choosing to hold cash and bonds.
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Now, besides the Fed's interest rates, at the beginning of this quarter, the world's attention turned to the yen. The yen has weakened the most in 40 years and currently remains in a weakening trend. What does the yen's weakening at this level reflect, and how will it impact the global market?
Please allow me to refer to slide 1. Why did people suddenly become interested in the yen at the beginning of the quarter? The key point is June 30th, which is close to July 1st. The Japanese Minister of Finance stated that they would respond with all appropriate and decisive measures to maintain the yen's value. In simple terms, the Japanese Ministry of Finance is ready to intervene, but the acceptable level, called the "pain threshold," will be higher. We are currently at 112.5. I believe 165 is a level where Japanese authorities might intervene. Let me look at their intervention history, which is on slide 26. In the past, Japanese authorities have intervened quite a lot. Slide 26 shows this. This image depicts the Bank of Japan intervening to support the yen. You can observe that the last intervention was on April 30, 2026. They intervened by buying up to 11 trillion yen and selling about 1.7 billion dollars. Despite such a large intervention, the yen only strengthened by 3.3%. This indicates that the next time, they might need to use a larger amount of money. The 11 trillion yen is more than what was used during the unwinding of yen carry trades in 2024, which was only 5.99 trillion yen. This suggests that more funds might be needed this time, along with interest rate hikes, which could happen sooner than expected. The consensus is that Japan might raise interest rates around December. UBS has already stated that they might raise rates in October. Therefore, it's possible that in October, we will see yen intervention and interest rate hikes, leading to the unwinding of yen carry trades. Currently, please allow me to look at slide 5. Currently, hedge funds, as they are called, hedge funds... please allow me to look at slide 4. This image indicates that currently, hedge funds have short positions in the Forex market, nearly 1.400 billion contracts, which is the highest since 2010. Therefore, you can observe that the currency that is being shorted, along with the stronger-than-expected Japanese economy, has led to a significant number of short positions in the yen.
Yes.
Yes.
Please allow me to look at slide 6. Slide 6.
Slide.
This is about the improvement in the Japanese economy. In simple terms, the impact of the weakening yen has led to a better Japanese economy.
Yes, and all of this increases the likelihood of a BOJ interest rate hike, right?
Yes. The improved economy will lead to an increase in BOJ interest rates.
Yes, but regarding the consequences of interest rate hikes, Professor, how will it change the market? Will the fear of unwinding yen carry trades occur, and how severe will the impact be on both the Japanese and global markets this time?
Please allow me to look at slide 2. Slide 2 is as follows: the weakening yen leads to what? Japan itself will face high import costs, increased inflation, and the BOJ may face increased pressure. Therefore, when the BOJ raises interest rates, Japanese bond yields will increase. Meanwhile, if US bond yields do not increase, the gaps will likely narrow. When these gaps narrow, it will lead to the phenomenon of unwinding yen carry trades. As I mentioned from the first slide, there is a chance of a "triple sell-off" occurring this quarter. What is a "triple sell-off"? It means the yen strengthens, the Japanese stock market declines, and bond yields rise while prices fall. Therefore, a "triple sell-off" might occur this quarter. The impact will be that stock markets globally might experience a sell-off. As we saw earlier, the VIX index is in a phase where Q3 is often a period of increased volatility.
One indicator I'd like investors to look at is on slide 16.
Slide 10, sorry, slide 10. One indicator that measures yen carry trades well is the Australian dollar against the yen. I'll use the term "dollar" for simplicity. Normally, we look at the US dollar against the yen, which is currently at 162. However, if we look at the Australian dollar against the yen, you'll notice that it's currently around 112. I believe the level of 110 will lead to a situation where falling below 110 will lead to a sell-off. Therefore, investors should watch this indicator. I've had the opportunity to study its correlation with sell-offs and the unwinding of yen carry trades. If the Australian dollar against the yen falls below 110, a sell-off might occur. Looking solely at the US dollar, which is currently at 2, it might not indicate much. However, the Australian dollar against the yen indicator could be significant. Let me look at its historical significance on slide 11. Slide 11. When we study past events, like in 2008, when the Australian dollar against the yen fell, below 110, it led to a global financial crisis. That was the crisis period. In 2013-2016, there were concerns about the Chinese economy and commodities. If you recall, during that period, oil prices were around $20-30. And at that time, there were concerns about China's property prices. That event occurred in 2013. At that time, the Australian dollar against the yen was significantly below 110. Even recently, in 2024 to 2025, the Australian dollar against the yen fell below 110. That was a phenomenon of unwinding, which is the return of yen carry trade funds. Therefore, you can observe that I use the Australian dollar against the yen as a leading warning signal that macro traders use for their analysis.
That's very interesting. We don't often see the Australian dollar and the yen used as signals. We've seen the dollar index, the dollar against the yen, or the VIX index. But in terms of their origin, why is this currency pair so important as an indicator?
The yen is a funding currency, isn't it? The Australian dollar is a commodity index, representing global commodity usage. You'll notice it's linked to the Chinese economy as well. Therefore, it represents global commodities. The Australian dollar is a proxy for commodity currencies, as well as high-yield currencies. Thus, you can observe that the AUD/JPY pair is a pair that has historical significance.
Yes, but the most important question is, what is the current level, and are we close to the danger zone yet?
Currently, it's at 112. So, it's still manageable, right on the edge. We need to monitor it closely because, as I mentioned, there's a possibility that the BOJ might raise interest rates in October. And there's a chance of intervention by the Bank of Japan. When do they usually intervene? If you observe carefully, their interventions usually occur when the market is surprised. Secondly, they tend to intervene when the bond yields are weak. Thirdly, they tend to intervene when the US economy is weak. Looking at past events, if hedge funds have large net short positions, as I mentioned earlier, around over 100,000 contracts, which is the highest in many years. Secondly, if US economic data is weak, bond yields are low, and the JPY raises interest rates in a surprising manner. Currently, the market does not anticipate a hike in October; most expect it in December. I believe that various economic conditions, leading to the unwinding of yen carry trades, have a chance of occurring in Q3.
Last time the BOJ raised interest rates, it shook the market in 2024. We saw Japanese stocks fall 12%. Professor, do you think this time will be as scary as the last time? Last time, it seemed like there was no preparation. This time, it seems like the world is somewhat prepared in advance.
Yes, the world is somewhat prepared in advance. But as I mentioned, global cash positions are at their lowest since 2003. Therefore, I think there will be some surprise, more or less, because the cash on hand might be low. Firstly. Secondly, if we look at the flows, we will see that at the end of Q2 and the beginning of Q3, investors started to reduce their risk positions and opted for defensive assets, choosing to hold cash and bonds. This indicates that investors are preparing for potential volatility in Q3.
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