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BoJ widow maker: Are investors shorting Japanese government bonds again?

By Neil Dennis

11:26, 12 July 2022

Haruhiko Kuroda, governor of the Bank of Japan
Investors appear to be shorting Japanese bonds as BoJ governor Kuroda (above) suggests more stimulus is on the way - Photo: Wikimedia Commons

It is often said that betting against the Bank of Japan (BoJ) is a "widow maker" trade. But hedge funds and other investors, mostly in Europe and the US, now appear to be challenging the BoJ by selling Japanese government bonds (JGBs).

Are there more widows to be made by adopting this approach? Take the current market environment as an example:

The BoJ has remained steadfastly behind its loose monetary policy for decades – even as many central banks began raising interest rates to tackle the post-pandemic global inflationary surge. Then in the past few weeks, a number of policy officials began to voice concerns over the free-falling yen - down nearly 20% this year against the dollar (USD/JPY). The market began to believe the BoJ might address the situation with the yen, and its losses slowed, with occasional upticks.

Then, this week, BoJ governor Haruhiko Kuroda said the BoJ was ready to conduct further stimulus to help shore up slowing economic growth – the yen resumed its drop.

Positioning against the BoJ is a "widow maker" trade because, no matter how low the yen goes, and how tempting it might be to call a bottom and position for a rally, there's always the coronary-twisting likelihood it's got further to drop.

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Widow maker: Japanese yen vs US dollar (USD/JPY) price chart

Japanese Government Bond trading

Bob Chen, investment analyst at Fidelity, noted in April 2020 that for JGB investors, "one trade that has always lost money has been the shorting of Japanese government bonds".

He added: "This trade, unique in its consistency, developed its own name: ‘the widow maker’."

The reason for this is simple: since 2016 the BoJ had adopted a policy of capping the yield on its 10-year JGB at around 0.25% either side of zero to help ease disinflationary pressures.

In defending this cap it can print and purchase an unlimited amount of bonds, leading to distorted yields on other bond maturities and a weaker yen.

Will the BoJ scrap the 10-year yield cap?

There has been some speculation that the Japanese central bank may become pressured into adjusting its yield cap policy.

AUD/USD

0.64 Price
+0.120% 1D Chg, %
Long position overnight fee -0.0072%
Short position overnight fee -0.0010%
Overnight fee time 21:00 (UTC)
Spread 0.00006

AUD/USD_zero

0.64 Price
+0.120% 1D Chg, %
Long position overnight fee -0.0072%
Short position overnight fee -0.0010%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.25 Price
+0.130% 1D Chg, %
Long position overnight fee -0.0047%
Short position overnight fee -0.0035%
Overnight fee time 21:00 (UTC)
Spread 0.00013

USD/JPY

154.46 Price
+0.050% 1D Chg, %
Long position overnight fee 0.0109%
Short position overnight fee -0.0191%
Overnight fee time 21:00 (UTC)
Spread 0.010

Jane Foley, senior FX strategist at Rabobank, noted on Monday that JPY net short positions had increased moderate last week, but remained significantly below recent highs.

She said: "The hawkish positions of other central banks had underpinned speculation that the BoJ may have been pressured into adjusting its YCC policy as soon as last month’s meeting.

"The BoJ held its dovish position, but speculation of a move is set to persist in the coming months and this, and some safe haven flow, has lent some support to the JPY."

 

Indeed, Nikkei reported last month that overseas bond investors in the US and Europe were already starting to challenge the BoJ's yield cap policy by selling JGBs, with London-based BlueBay Asset Management saying it was building a sell position on JGBs using the futures and swaps markets.

Neil Shearing, group chief economist at Capital Economics, said: "The sell off pushed the 10-year yield to the upper limit of the BoJ's range, forcing it to purchase increasing amounts of government debt to maintain its target – by some measures, if it carried on buying at this month’s pace, it would own the entire market of outstanding JGBs within a year."

What impact on the yen?

So, the BoJ keeps printing and the yen keeps falling - although the yen has other market fundamentals underpinning its weakness.

With the BoJ still maintaining ultra-loose monetary policy, set against the US Federal Reserve's hawkish assault on inflation, with back-to-back 0.75% rate hikes likely, the dominant position has been to short the yen – that is betting that its exchange rate against other currencies will fall.

For the time being, safe haven flows aside, it's likely to remain the dominant trade for the yen (USD/JPY), until the BoJ decides different.

Markets in this article

USD/JPY
USD/JPY
154.459 USD
0.074 +0.050%

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