Forex Flash: G20 stands mum on BoJ activity – UBS

FXstreet.com (Barcelona) - The silence of G20 Central banks over the BoJ's activities has been deafening to say the least. Developed market policymakers are holding back lest they be accused of hypocrisy, while Emerging market authorities may have geopolitical priorities in mind and do not want to open up new areas of tension. “Nonetheless, as their own asset markets have become far more open to overseas investment over the past few years, and more likely to be targets of upcoming Japanese investment, they may soon face their own 'inversion' problems.” warns Research Analyst Gareth Berry at UBS.

The Eurozone was the biggest net recipient of Japanese portfolio flows over the last 12 months (France the biggest beneficiary), and the flows may rise further across the periphery as the search for yield and carry squeezes Japanese investors into these markets. Great for Japan, but it also reduces incentives for all net recipient countries to rebalance their economies away from their current deficiencies. If there is one lesson that the credit crisis of the late 2000s and the Eurozone sovereign debt crisis has taught policymakers, it is that long-term mispricing of risk-premia only leads to greater structural stress further down the line.

Just when G20 central banks are thinking about allowing the lessons to be learnt as exits are planned, the BoJ threatens this process. For the investor, if you see a yield curve start to flatten or even invert in a way that defies fundamentals, it might be worth putting on a long-JPY trade against the currency of the market as a violent unwind will be inevitable somewhere down the line.