The bank wishes to remain nameless, so here is a bit of a summary of their note that I can't credit, unfortunately.
In summary:
- Japanese investors have likely purchased more US fixed income at more attractive yields
- This has supported USD/JPY
- but the rising yields have coincided with a steepening in the US yield curve
- making conditions favourable for Japanese investors to increase hedges on USD-denominated assets - they can now earn a nearly riskless yield in the United States while also satisfying minimum return requirements to clients
- Japan could thus be "one of the major recipients of inflows" of a rotation away from the US
- this could also support a JPY rally despite risk-on
- yen can also rise even under adverse economic outcomes
- thus there is an asymmetric return profile in JPY going forward
- and potential for very large gains against the USD if Japanese investors increase hedge ratios on USD-denominated assets in 2021
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You may recall why 100 will be interesting if we get there:
