A shift in tone from Japanese officials and rising Japanese bond yields point to possible Bank of Japan tightening, which could unwind the yen carry trade. Analyst Laurent Maurel argues that such a move — especially if oil prices rebound — could weaken the dollar and restore gold's role as a safe-haven asset.
Japanese politician Nagahama argued this week that the Bank of Japan should keep raising rates to correct the yen's weakness, a comment analyst Laurent Maurel reads as a meaningful shift in tone from officials who until now stressed supporting the economy. According to GoldBroker.com, Nagahama said: "Moderate BOJ rate hikes are important in rectifying excessive yen weakness". The yen has fallen to its lowest level against the dollar in nearly forty years, driving up import costs and squeezing household purchasing power.
The bond market and currency market disagree
Maurel points to a widening gap between two markets. Japanese 30-year yields have been rising sharply for several weeks while U.S. yields stabilize, narrowing the spread between the two countries. Historically, a narrowing spread has coincided with a stronger yen, because investors have less incentive to borrow cheap yen to fund dollar assets.
Yet the yen remains weak. The foreign exchange market, Maurel writes, still does not seem to price in the signal the bond market is sending — even as Japanese officials increasingly favor monetary normalization. He sees two possibilities: currency traders eventually follow the bond market and the yen appreciates, sometimes sharply, or the bond market is overestimating the BoJ's ability to keep tightening.
Why the carry trade matters for gold
Recent statements from Japanese officials, in Maurel's reading, reinforce the first scenario, and that poses a growing risk to the yen carry trade. For more than fifteen years, investors have borrowed trillions of yen cheaply to buy higher-yielding U.S. bonds, stocks, and credit. If Japanese rates keep climbing and the yen turns, some of those positions could unwind, pulling liquidity well beyond Japan and raising volatility across markets.
Oil could accelerate the shift. Japan imports virtually all of its energy, so a sharp rebound in prices would force importers to buy more dollars, pressuring the yen further. In that environment, Maurel argues, a weaker dollar and a broad reallocation of capital would let gold resume its safe-haven role. He notes gold has been correcting recently in both dollars and yen on a strong greenback and lower inflation expectations — a correction he suggests could mark an attractive entry point if Japan's monetary regime shifts.
Source: GoldBroker.com
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