Morgan Stanley Warns Yen May Fall to 170 Amid Strong Auctions of Japan's Ultra-long-term Bonds

The Japanese currency and bond markets are facing a critical turning point. Alberto Tamura, Head of Morgan Stanley Japan, stated in an interview with Bloomberg TV that the yen could appreciate to 140 against the dollar or depreciate to 170, depending entirely on the subsequent actions of the Bank of Japan.

Some investors believe that the Bank of Japan's response has been half a beat slow, and if the bank fails to raise interest rates in June, it will directly impact the bond and foreign exchange markets. Despite the Japanese authorities' multiple interventions in the market since the end of last month, the yen continues to face pressure.

Japanese Finance Minister Katagai Tsukiyoshi said after meeting with G7 officials in Paris on Tuesday that decisive and bold actions would be taken if necessary. Although these remarks led to a short-term recovery of the yen against the dollar, the market's concerns about inflation and fiscal policy have not been alleviated, and these worries have contributed to a significant decline in Japanese government bonds. Alberto Tamura pointed out that the Japanese authorities do not wish to see the yen depreciate further from its current level, and under the premise of a stable global situation, action taken by the Bank of Japan will be the core path for the yen to strengthen.

After several weeks of severe volatility, the Japanese long-term bond market received a brief respite on Wednesday. In the 20-year bond auction held by the Ministry of Finance, the bid-to-cover ratio reached 4.01 times, significantly higher than the average of the past 12 months. Following the announcement, the yields of 20-year, 30-year, and 40-year government bonds fell to varying degrees. Bloomberg strategist Mark Cranfield stated that the two-largest Japanese government bond underwriters collectively purchased about 60% of the issuance, signaling to investors that large institutions believe the current yield has configuration value.

Even though this bond auction result was better than market expectations, the overall pressure situation has not fundamentally changed. Less than 24 hours before this auction, the 20-year bond yield had reached its highest level since 1996. SMBC Nikko Securities senior interest rate strategist Ataru Okumura pointed out that the downward movement of yields was merely a short-term technical correction after a sharp rise, not a reversal of the general trend. Currently, the situation in the Middle East has raised oil price inflation expectations, and the weakening of the yen is also intensifying inflation risks in Japan. The interest rate swap market has now priced in about an 80% probability of the Bank of Japan raising interest rates at its June meeting. In addition, Prime Minister Takashi Hayase's request for a supplementary budget has sparked market concerns about the potential for the Japanese government to finance through additional government bonds in the future, which further suppresses long-term bond assets.