Japan owns $1.2 trillion of US Treasuries, and with 10-year interest rates on JGBs rising above 1% for the first time in more than a decade, Japanese investors will begin to find their own yen-denominated bonds relatively more attractive compared with US rates.
Put differently, as Japanese yields move higher, the global savings glut will shrink, putting upward pressure on the US term premium, see also Bernanke’s speech from March 2013 discussing this dynamic.
Any decline in USDJPY driven by such Japanese repatriation could be magnified once the Fed begins to cut interest rates. Then USDJPY would move lower not only because of higher long rates in Japan but also because of lower short rates in the US.
The bottom line is that rising long-term interest rates in Japan put upward pressure on long-term US Treasury yields, steepen the US yield curve, and put downward pressure on USDJPY.
For more, see also our chart book looking at Japanese demand for US Treasuries available here.
Source: Bloomberg, Apollo Chief EconomistSource: Bloomberg, Apollo Chief EconomistSource: Bloomberg, Apollo Chief Economist
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