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THE INSIDE JAPAN COLUMN: Yen Gains on Cohn Tangle; BOJ Operation in Focus: Inside Japan

(Bloomberg) — Yen extended overnight gains on concerns the confusion in U.S. politics could undermine the American economy by hindering implementations of key policies. Bonds will focus on the Bank of Japan’s market operation after it cut the amount of long maturities earlier this week.

  • USD/JPY falls 0.2% to 109.40, extending the drop from Thursday when it shed as much as 0.7% after a false report that Gary Cohn was resigning as director of President Donald Trump’s National Economic Council
  • “Economic data was good but the USD/JPY is weighed down by negative sentiment from political issues. Market doesn’t seem to have momentum to push the pair below 109 ahead of events such as Jackson Hole but any shock from current levels could sway markets significantly, making it even more difficult to buy USD/JPY,” says Kuniyuki Hirai, head of trading at MUFG Union Bank in New York
  • “Yen may extend gains if Asian stocks decline and stoke risk aversion sentiment. Concerns about North Korea, U.S. politics and other factors may override Japanese demand for dollars. We should be cautiously watching whether there will be a risk aversion spiral of decline in stocks, rally in bonds and yen,” Naoto Ono, currency analyst at Ueda Harlow Corp. in Tokyo, writes in note
  • Secretary of State Rex Tillerson and Defense Secretary Jim Mattis said the prospect of U.S. military action remains on the table in response to North Korea’s nuclear threat, rejecting an assertion by senior White House adviser Stephen Bannon that there’s no such option
  • Fed Chairman Janet Yellen will speak at the Jackson Hole conference on Aug. 25
  • U.S. 10-year Treasury yield fell 4bps to 2.19% on Thursday
  • USD/JPY FX options expiring on Friday include $300m strike at 109 and $500m strike at 110.60: DTCC

BONDS

  • JGB futures ended overnight session up 0.05 to 150.65 while 10- year yield inched up 0.5bp to 0.045%
  • “JGBs will likely be firm on the back of risk-aversion mood. The BOJ probably won’t cut 5-10 year bonds today as it has never done a back-to-back reduction of that zone. But market has shown resilience to such moves so impact may be limited if there was a reduction,” Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities, writes in note
  • BOJ is buying bonds in 1-to-3, 3-to-5 and 5-to-10 year maturities
    • After BOJ cut 5-10 year bonds by 30b yen to 440b yen at its operation on Wednesday, 10-year yield fell to 0.04%, lowest since June 7
  • BOJ could trim its bond purchases again as early as Friday should the 10-year yield fall further, and the yen and stocks remain stable, money managers say

–With assistance from Mika Otsuka. To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net Colin Keatinge, Naoto Hosoda

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