BNY’s Bob Savage reports that Japanese equities have reached new record highs, fully recovering from losses incurred during the Iran war. Despite this rally, international investors’ allocations to Japan and Japanese Yen (JPY) hedges have not returned to their pre-conflict levels as of February, according to BNY’s holdings data [1]. Savage notes that while the Nikkei index has surged, international investors’ asset allocation to Japan remains below the levels seen before the conflict, when it was close to the MSCI ACWI index [1].
The analysis highlights that JPY holdings are primarily driven by the hedging of Japanese investments abroad, with foreign hedging activity having restarted in the last week of March. The data indicates that Japanese outflows into the U.S. and other markets have not matched the scale of inflows, which continues to exert pressure on the JPY [1].
Savage argues that the risk of intervention by Japan’s Ministry of Finance (MoF) will have a muted effect on the currency until these hedge positions unwind. He points out that the basis trade in Japanese Government Bonds (JGBs) against U.S. bonds is part of the current narrative. As a result, expectations for a Bank of Japan (BoJ) rate hike are likely to be a key factor influencing the USD/JPY exchange rate in the coming weeks [1].
No specific market reactions, analyst forecasts, or forward-looking statements beyond the emphasis on BoJ rate hike expectations are provided in the source [1].
CONCLUSION
BNY’s analysis suggests that while Japanese equities have rebounded strongly, the JPY remains under pressure due to persistent foreign hedging and limited outflows. The effectiveness of potential MoF intervention is expected to be limited until hedge positions unwind, making BoJ rate hike expectations a critical driver for USD/JPY in the near term.