Yen Losses Seen in Canned-Tuna Prices Eroding Yields
Comment of the Day

April 09 2013

Commentary by Eoin Treacy

Yen Losses Seen in Canned-Tuna Prices Eroding Yields

This article by Mariko Ishikawa, Masaki Kondo and Hiroko Komiya for Bloomberg may be of interest to subscribers. Here is a section
"The yen could easily depreciate to about 120 per dollar” with declines in real yields, Hiromichi Shirakawa, Japan economist at Credit Suisse Group AG in Tokyo and a former BOJ official, said in an interview yesterday. “Rising inflation expectations will weaken the yen and help actual price gains.”

Imported Inflation
While the weaker currency will be a boon for parts of the economy, including exporters such as Nintendo Co. and Toyota Motor Corp. by boosting the value of overseas sales, it's pushing up import costs. Japan relies on other nations for almost all of its oil and gas and about 60 percent of its food on a calorie basis, according to government figures.

Eoin Treacy's view When consumers have experienced deflation for such a long time, they tend to delay purchases in the hope that prices will deteriorate. However, now that the government and central bank have joined forces to aggressively target inflation, consumers will need to change strategies. This article from the South China Morning Post highlights how Japanese purchases of expensive foreign manufactured items have surged as the Yen has fallen. This would suggest that consumers are getting the message and should help the velocity of money to increase.

In attempting ascertain what effect Japan's QE program will have on fixed income bonds I thought it might be instructive to compare its inflation protected securities to that of another country which is aggressively targeting inflation: the UK.

The UK's 5-year inflation protected yield has fallen from a peak of over 4% in the teeth of the credit crisis to a recent low of -2.6%, (660 basis points). The Bank of England's quantitative easing program has put such a premium on inflation protection that investors are willing to tolerate negative returns. This is particularly noteworthy when compared to the yield on the FTSE-100 which is currently 2.8% or 1.2% in real terms. Yields have contracted for 12 of the last 14 weeks and potential for an unwind of the short-term overbought condition has increased.

Japan's most liquid inflation protected bond is its five-year and it hit a low of -1.4% last month. While it is currently unwinding the short-term overbought condition, a break in the yield's progression of lower rally highs would be required to check medium-term potential for further contraction.

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