USD/JPY Splits From US Yields: A Tale Of Two Central Banks

-- USD/JPY is usually quite well correlated with U.S. Treasury yields
-- However, in recent days the dollar has shot up while yields have continued to slide
-- Blame the central banks


LONDON (Dow Jones)--Trust a central bank to ruin a good correlation.

The link between U.S. Treasury yields and the dollar/yen exchange rate is usually pretty strong. No mystery here. When U.S. yields are higher, Japanese investors pile in. When yields are low, as they are now, those investors are more tempted to go somewhere else.

However, in the last few days this link has been upset. Treasury yields have continued to fall as the market has attracted safe-haven flows caused by the Greek debt crisis, but USD/JPY has broken higher thanks to Tuesday's action by the Bank of Japan.

It expanded its bond-buying stimulus package in an attempt to boost growth, surprising the markets in the process. Sure enough, the yen plunged to its lowest level in more than three months against the dollar, doubtless to the glee of hard-pressed Japanese exporters.

BoJ asset purchases undermine the yen by increasing the money supply, much as the bond buying undertaken in 2010 by the Federal Reserve weakened the dollar.

So, will Treasury yields and USD/JPY recouple? They should, as their link is time honored. But, for the time being, it seems, the respective central banks will be meddling with it as a by product of their other policy goals.