With the highest debt/GDP ratio in the developed world (at well in excess of 200%) and with yields on its 10 year bonds at just a fraction over one percent there is a real enigma about the macro financial picture in Japan. In recent weeks, despite the protestations of the BOJ, including a round of intervention in the FX market, the yen has continued to strengthen against most major currencies. On July 15th, USD/JPY closed below the pivotal 80 level and during the course of the preceding week had reached back down to within less than 300 pips of the historic lows seen right after the tragic events of March 11th.
Here are just two observations on key factors that keep pushing the yen higher. Both of them reflect the activity of the People's Bank of China (PBOC)
The PBOC have at least two motives for wanting to see a strong yen:
1. China is extremely keen to diversify its holdings of FX reserves so that it is less reliant on the USD (esp if more QE is on the horizon) and the yen is a currency for which there is a deep and liquid market.
2. The higher the yen is against the US dollar and other currencies the more competitively priced will be Chinese goods, priced in RMB which is fixed against the dollar, for exporting to major consumer markets.
Despite what the BOJ may say the PBOC have a larger wallet.