Seeking to encourage

They did it

Japan calling in the pension fund cavalry is bullish yen. It’s one of the biggest levers they can pull to support the currency. Will it instantly send USDJPY to 155? No. But it will create another change in the Japanese flow dynamic. You already will have less USDJPY buying from oil importers; now you will have less cross/JPY buying from pension funds. And maybe some selling from GPIF.

Here’s the headline from Reuters, in case you missed it:

Japan is seeking to encourage its Government Pension Investment Fund, the world’s biggest pension fund, to boost investment in domestic assets, Finance Minister Satsuki Katayama said on Friday. The fund owned 293.4 trillion yen ($1.8 trillion) in assets at the end of December, so its allocation decisions carry significant weight for global markets, and the announcement sent the yen and Japanese government bonds ​higher.

“Seeking to encourage” is funny wording considering the government controls GPIF. Regular readers know that I have been advocating this move for a while, and I suppose the only question is “What took so long?” In January, I wrote:

The problem Japan faces is that if the BOJ tries to stabilize the bond market by buying bonds, that will be viewed as QE and the market will sell the JPY, which Japan does not want. If the BOJ sounds hawkish or hikes unexpectedly, it might stabilize the back end by reestablishing credibility on inflation… Or it might just trigger another massive leg lower in bonds as the BOJ ratifies the market’s view that yields should be way, way higher. It’s tricky. A one-off hike isn’t a game changer, so unless the BOJ goes mini-Volcker by hiking and announcing a stronger commitment to fight inflation, the result could be unappealing.

There is a solution that ticks every box, and I am not sure why they have not used it yet. The clear solution is for GPIF to sell foreign bonds and buy JGBs. It would sound more technical than that, but that should be the gist. GPIF’s allocation to foreign bonds was 11% in 2015 and that was upped over time to its current level around 25%. GPIF is absolutely huge, they have more than $1.7T under management. And the other big pension institutions in Japan, which are generally risk averse, will follow whatever GPIF does. GPIF currently holds around $400B of foreign bonds and a change in allocation there would send a strong signal for the start of a Japanese repatriation theme.

This would be enormously bullish JGBs and JPY at the same time. It would not crush the Nikkei the way more rate hikes might. It would serve a domestic policy purpose and allow them to reverse a 10-year rotation that was mostly enacted because of the huge spread between Japanese yields (low) and foreign yields (way higher). It would make sense from every angle and would also fit with a potential global repatriation vibe.

Recall that the GPIF announcements in 2015 were absolutely epic for the JPY (bullish USDJPY) and Nikkei. GPIF’s movements were a key component of the market reaction to the Abenomics platform and drove the JPY weaker for two full years. So, if GPIF makes an announcement of this sort… Get on board quickly. The lifers will follow and it will be a trend that could last a year or more.

To be clear, I am not predicting this is imminent. I’m saying be ready just in case. I do think it’s the most logical and clean solution to the weak JPY and weak JGB problem and the odds of it happening after the election are way above zero.

It was not imminent, but now it’s happened. The reaction in yen and JGBs is logical, but small relative to what I would have expected. It seems the market is a bit hesitant here. That creates an opportunity to get on board. The question, however, is what exactly to do. The government persuasion will very likely lead to a change of flows in Japanese time and could even be backed up with physical MOF intervention to show the market who is boss; but this is not the kind of trade where you will necessarily get instant gratification. And the carry remains an obstacle, as does downside USDJPY skew.

In order to avoid the carry problem, and avoid adding another USD short when I already have short USDKRW and USDMXN, I like buying CHFJPY downside. Short CHFJPY is positive carry and by doing a put spread, you benefit from the skew (buying a lower vol option and selling a higher vol option). I like a 2-month 199/196 CHFJPY put spread as the strikes as 196 is the 2026 low and should be major support while the current distribution pattern starts to break down if we take out 199. See sidebar.

Off 200.50 spot, the 199/196 put spread will cost around 37bps. Pay 37 to make 114 and September 10 expiry gives you plenty of runway. Some will laugh and say “CHFJPY short never works!” but that’s what they said about USDKRW too.

Shots fired!                                 :]

If you can’t trade options, you can short here with a stop at 203.11 and you get paid to wait if it goes nowhere. Please remember I am in the business of sharing ideas, not investment or trading advice. Please trade your own view and do the next right thing. am/FX neither endorses nor opposes any causes.

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Calendar

This is a calendar. CPI and Warsh the biggies.

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Final Thoughts

1. I am intrigued by the relative strength of crypto and still think PURR will be higher over the next month or so. The entry point from when I first said that is higher, so I acknowledge it has been a bad idea so far, but I still believe we are forming a big choppy base in that thing.
2. ORCL above 140 is an extremely bullish hourly chart formation as per the chart I sent out yesterday. I don’t know why ORCL would rally from here, but the risk/reward is pretty clear and it’s easy to know where you’re wrong.
3. The USD is weakening sans any huge catalyst, so imagine if CPI is weak.

I hope that today you achieve your GOLLLLLLLLLLLLLLLLLLLLLLL! GOLLLLLL! GOLLLLLLLLLLLLLL!

Oil strategists in 2026

:]

good luck ⇅ be nimble