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The Asset Class: Jason Borbora-Sheen · Strictly Business Podcast

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  You're listening to Strictly Business Podcast with Lindsay Williams.
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  The Japanese yen hit a 40-year low in the last few days, climbing to nearly 164 to
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  the US dollar, its weakest level
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  since 1986.
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  In response, Japan and the United States carried out their first coordinated yen
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  buying intervention since
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  1998.
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  28 years ago, banks were asked to buy yen and the currency snapped back to sort of
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  157.
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  And Japanese Finance Minister Satsuki Katayama confirmed that Tokyo and
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  Washington acted together in the currency
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  market to arrest what officials consider excessive yen declines.
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  With me is Jason Borbersheen, Portfolio Manager at 91 in London.
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  I suppose the obvious question is why when there's been a bull market for 40 years
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  and the last intervention,
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  coordinated intervention, was 28 years ago.
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  Why did they do it, Jason?
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  So.
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  The simple answer, I suppose, is that there's a view held both by
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  primarily, I suppose, the Treasury Secretary Besson in the US, and likely
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  acknowledged by, if not
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  desired to achieve any ends with respect to changing it, but also by the Japanese
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  authorities, that the
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  yen is at quite a weak level relative to interest rate differentials, i.e., for
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  example, the yield in...
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  short-dated US treasuries and Japanese government bonds, and possibly also
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  relative to the
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  strength of inflation and growth in both of those economies, that the yen is simply
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  out of whack.
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  And therefore, from a trade perspective, something that we know the administration
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  from time to time is focused on
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  and does have an agenda around, the yen should probably be stronger than it is in
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  order to equalize some of the
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  exporting competitiveness.
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  of Japan versus the US.
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  If you have a look at the obvious headline grabbing imports and exports for Japan,
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  they import oil and food and they export cars
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  and gadgets.
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  I mean, that's been the case for so long.
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  So one sector of the economy in Japan probably quite likes a weekend and the
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  other doesn't.
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  So I suppose you've got to achieve a balance somewhere and also achieve a
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  balance in satisfying the desires of the United
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  States.
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  And I think the latter is probably taking some primacy at least more recently.
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  We know that the trade secretary has from time to time mentioned the weakness of the
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  yen.
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  We know that Donald Trump going back over the decades in fact to I think the very
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  one of the earliest sort
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  of trade-based statements he made in the multiple decades ago pertained to the fact
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  that Japan
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  had a manipulative or low currency relative to its fundamentals.
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  So I think there's there's certainly something coherent in it.
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  In terms of though, I suppose what's most notable, it is that coordination.
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  As you say, it's been a long time since there's been a coordinated buying effort
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  of the yen.
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  There was actually a coordinated selling effort in 2011 when following the Japanese
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  earthquakes, there was a
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  great deal of strength in the Japanese currency.
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  I mean, I think what's perhaps different about the moves this time around relative
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  to the past, So there are
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  sort of and have been...
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  A few episodes, if we look back over the last five, ten years of Yen intervention,
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  so the Yen has been on
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  a weakening path now for some time.
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  We had seen sort of earlier in July a bit of a hint, although it's very quickly
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  reversed.
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  And that's the sort of dynamic which is normally played out, which is to say that
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  the Yen, when intervened in by the
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  authorities, will typically move, let's say, between 3% and 5%, will typically
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  appreciate between 3% and 5%.
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  it will then typically give that back over the following 30 to 60 days.
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  So there's a sort of small impact initially.
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  It may clear out investors who have got overly positioned, but unless you change
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  the economic fundamentals or monetary
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  or fiscal fundamentals behind why the yen is weakening, which in this case I think
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  is because real rates in Japan, that is to
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  say interest rates adjusted for the level of inflation being received, are just very
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  low.
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  And so.
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  in order to give a bit more support to the currency, you need to change that.
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  You need to change some of those dynamics.
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  And I think that's what would next need to happen.
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  You could get a stronger response this time around from the yen simply because it
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  is coordinated.
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  So I think if you look at the most recent episodes when there hasn't been the US
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  involvement, we are talking about three to five percent.
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  If we look at that 2011 episode, I'm not going to go back to the 90s because I
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  think too much has changed.
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  But if we look at the 2011 episode, in that case where they're trying to engineer
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  a depreciation you've got a sort of 8 to
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  9 depreciation in the currency when there was coordination.
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  So maybe you could make a case for well when there's a coordinated yen buying in
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  this case you should get a you know
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  five to eight percent appreciation in the yen rather than a traditional one-sided
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  intervention which is only sort of three to five.
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  So I can see the case for that we have been exposed to the end more recently on
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  the basis that we thought intervention was more and more likely
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  but we have actually reduced that over the last days on the basis that most of the
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  move we think for a traditional intervention is
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  done.
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  So there's still some upside potentially, either because it's a more coordinated one
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  or because maybe you make a case this time around for some policy change in Japan,
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  but otherwise it's likely a fade.
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  I'm showing my age now because in the 1980s when I used to sit on the trading
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  desk and the US government used to intervene to stop
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  the decline of the US dollar, the trading desk manager would say, OK, let's stand
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  aside now, let it
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  all pass for a couple of days and then start buying Deutsche Marks and Swiss
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  francs again now I'm not saying that's the case
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  here because of the coordinated nature of it But it sounds to me as though something
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  much more long-term and fundamental needs to happen for
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  the end to arrest a 40-year decline What does it mean for global fixed income and
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  also your positioning if you would
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  yeah sure I mean, I think ultimately to your point there You know it's a bit of a
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  sticky plaster or maybe it's a sort of very
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  short-term if you like the analogy taking a pain relief tablet.
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  But if you have an underlying cause for the headache, ultimately, it's not going
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  to resolve that.
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  It's just going to disguise it for a while.
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  In terms of the broader implications of it, there's probably two timeframes.
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  There's a short frame in which I think it doesn't particularly matter very much in
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  that the move is pretty
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  esoteric to the currencies involved, the way in which it's been done, where it
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  appears to be
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  the US Treasury using some euro.
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  exposure where also there are multiple other lines available to
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  move yen currency that don't involve selling U.S.
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  treasuries, which is what a lot of the fear was about, that there's so much debt
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  owned by
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  Japanese individuals, corporations, government, etc.
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  that is in U.S.
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  treasuries that if they were trying to buy back some of their currency would involve
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  selling that.
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  There's been a lot made by Besant around how there are means of structuring these
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  changes that won't involve selling it, that ultimately the short-term impact
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  appears to be very, very modest.
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  The longer term though, implications could be that this says something about where
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  we've reached globally in terms of the
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  kind of capex cycles and how things are going to be funded from here on in.
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  and that this actually is a sort of another factor alongside some of the moves
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  that we've seen, for example, in hyperscaler
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  debt markets, i.e.
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  where, you know, there's been a lot of debt issuance and credit markets are
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  showing some signs of indigestion, etc.
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  That could suggest that, you know, fixed income's got more of an adjustment to go
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  from a yield perspective, that actually the
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  neutral rate is higher and higher from here, that the Fed actually need to go
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  higher in rate terms and other central banks may need to follow them.
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  That's that I think there was a sort of 12 month to 36 month view.
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  We are somewhat cautious on fixed income.
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  That's mostly, though, being in portfolios represented by owning short dated bonds
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  and not
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  owning or being outright short, longer dated bonds.
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  And that curve steepness, we think, is sort of related to a lot of those
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  dynamics.
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  We shall watch our screens with a good deal of fascination over the next few days
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  to see if they might do it again.
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  And then Jason, we might speak again.
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  Thank you very much for your time and your analysis.
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  Jason Borbrasheen is a portfolio manager at 91 in London.
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  The views and opinions expressed in these podcasts are those of Lindsay Williams and
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