Investors Flee to Hedges as Japan Rate Expectations Soar

Investors are rushing to hedge against rising Japanese interest rates after the Bank of Japan's unusual joint US-Japan intervention last month.

The intervention, which saw bulk purchases totaling an estimated $82bn and $10bn on July 30 and 31 respectively, has triggered a surge in hedging activity with a record $1trn notional of yen interest rate derivatives changing hands in the week ending July 31.

Japanese borrowers are increasingly buying derivatives to fix their interest rate exposures for the coming two years amid heightened uncertainty over the outlook for monetary policy, according to Jackie Bowie, head of EMEA at hedging advisory firm Chatham Financial.

The Bank of Japan's benchmark interest rate sits at 1%, but market expectations imply a roughly 60% probability of a September hike, up from 30% a few weeks ago.