We would suggest remaining long yen against the dollar, supported by a widening underlying Japanese current account surplus. JPY/GBP could be an even better trade, given the Labour strife in the UK.
The Japanese central bank was under further pressure this morning defending its yield cap ahead of its two-day policy meeting. The 2-year JGB yield rose to 0.058%.
An exit from YCC will not be smooth. The sustainability of the Japanese public finances will be called into question. The initial Kishida budget for FY23 included a record allocation for servicing the debt (Y25.3tr): the sensitivity to higher rates has risen with the ballooning government debt burden.
Yen appreciation has reduced hedging costs, which could limit some of the pressure on other sovereign bond markets.
However, fiscal policy remains too loose globally. There is not enough focus on the huge supply of global government bonds that will need to be absorbed over the coming years, in an environment of QT. Ultimately, this may limit the rally in government bonds (US, Eurozone, UK) despite the improved inflation outlook (in the US at least).
