Yen Carry Trade Unravels as BoJ Slows Bond Purchases

The Bank of Japan's (BoJ) decision to hold 49% of outstanding Japanese government bonds has led to a significant shift in the yen's appeal for carry trades. The BoJ is scaling back its monthly purchases to around ¥2 trillion by March 2027, and other central banks, such as the ECB and the Bank of England, are also reducing their bond holdings. This decrease in demand has caused Japanese yields to rise, making it less attractive for investors to buy yen-denominated bonds.

Massimiliano Silla, an independent financial adviser, suggests that Western government bonds should be managed with caution. He notes that buying unhedged US or UK government bonds adds 8% exchange rate volatility to a coupon of 4-5%, effectively turning a safe haven into a gamble. Silla recommends diversifying investments and utilising active management with currency hedging to avoid concentration risks.

The impact on Western government bonds is expected to be noticeable, particularly for European bonds such as BTPs and OATs. Francesco Sandrini, CIO Italy & Head of Multi-Asset at Amundi, reassures that the bulk of Japanese investors' sell-offs has already taken place, but pressure will remain pronounced on these European bonds.