Yen Plays Catch-Up for Asia With Target 75 to Dollar
Japan's Prime Minister Naoto Kan
Tomohiro Ohsumi/Bloomberg
Japan's Prime Minister Naoto Kan.
Japan's Prime Minister Naoto Kan. Photographer: Tomohiro Ohsumi/Bloomberg
Aug. 30 (Bloomberg) -- Naomi Fink, a Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd., talks about the value of the yen. The Bank of Japan held an emergency board meeting today as the yen’s surge to a 15-year high forces policy makers to find ways to support the nation’s slowing expansion. Fink speaks from Tokyo with Rishaad Salamat on Bloomberg Television. (Source: Bloomberg)
Aug. 27 (Bloomberg) -- Derek Halpenny, European head of foreign exchange at Bank of Tokyo-Mitsubishi UFJ, talks about Japanese Prime Minister Naoto Kan's comments that he would be willing to take “bold” action on currencies. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Aug. 27 (Bloomberg) -- Lisa Fox, global head of strategy at JapanInvest, discusses Japanese currency policy and the challenge to Japanese Prime Minister Naoto Kan's leadership by Ichiro Ozawa. She talks with Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)
Japan Prime Minister Naoto Kan says he is ready to take “bold” action as the yen approaches its postwar high against the dollar. Traders say new records are inevitable even after this year’s 9.8 percent gain.
Japan’s currency needs to rise 46 percent to equal its strength in the mid-1990s based on the Westpac Real Effective Exchange Rate Trade Weighted yen index, which accounts for an inflation rate that’s been mostly negative since 1998. Deutsche Bank AG, the world’s biggest foreign-exchange trader, estimates on that same basis the yen would have to gain to 55 per dollar from 85.22 last week to match the record 79.75 in April 1995. The Bank of Japan expanded a bank-loan program today as pressure mounted on it to fight deflation and weaken the yen.
“In real terms, the yen is not really that strong compared to 1995,” said Eisuke Sakakibara, known as “Mr. Yen” for his efforts to influence exchange rates when he was Finance Minister from 1997-1999. “In 1995 we were in crisis. Now, given the fact that the U.S. recovery is faltering and the Japanese economy is doing relatively better, I think this situation is not what you call a crisis situation.”
Unlike 15 years ago, Japan is less reliant on the U.S. for trade. Asia, which has some of the world’s fastest-growing economies, accounted for more than 50 percent of Japanese exports last year for the first time, while U.S.-bound shipments made up 16 percent, about half the level from a decade earlier, Ministry of Finance data show.
Relative Growth
While Japan’s economic growth is slowing, it’s still projected to be faster than the U.S. or euro zone. Growth may total 3.4 percent this year, compared with 3 percent in the U.S. and 1.4 percent for the 16-nation euro area, according to the median estimates in separate surveys by Bloomberg. At 5.2 percent, Japan’s jobless rate is the lowest of the Group of Seven nations.
Traders are also attracted to Japan’s current-account surplus. The country doesn’t need to rely on foreign capital to fund a trade deficit, making the currency a haven in times of crisis. Exports exceeded imports by 804.2 billion yen ($9.36 billion) in July, more than the 466.3 billion-yen median estimate of 24 economists surveyed by Bloomberg. The nation’s foreign-exchange reserves total $1.01 trillion, second only to China’s $2.45 trillion, according to data compiled by Bloomberg.
Huge Surplus
“Given the fact that Japan still boasts a huge current- account surplus, a relatively stable financial system and large offshore assets, people will keep buying the Japanese currency as a hedge against downside risks to the global economy,” said Seiya Nakajima, chief economist in Tokyo at Itochu Corp., Japan’s fourth-largest trading firm. “It would not be a surprise if the yen breached 80 per dollar and hit a record high” if officials don’t intervene, he said.
Strategists increased their median year-end estimate for the yen against the euro by 23 percent since Dec. 31, the most among 61 foreign exchange pairs tracked by Bloomberg except the Ukrainian hryvnia versus the European currency. The consensus yen-dollar forecast has increased 7.1 percent, the third-biggest jump among the major currencies.
The yen rose as high as 83.60 per dollar on Aug. 24, the strongest since June 1995, from 2009’s low of 101.44 yen reached in April that year. The currency gained to touch 105.44 per euro, the highest since July 2001 and up from 134.38 in January.
The yen has advanced 15 percent this year based on Bloomberg Correlation-Weighted Currency Indexes, the biggest gain among the currencies of the developed world.
‘Severe Situation’
The BOJ will boost the amount of funds in a credit facility by 10 trillion yen ($116 billion) to a total of 30 trillion, the bank said after an emergency meeting today in Tokyo. Governor Masaaki Shirakawa, who cut short a visit to the U.S. to return to Tokyo, will hold a news conference at 2:30 p.m. in Tokyo.
The yen pared declines after the decision, trading, at 84.74 at 2:512 p.m. in New York, after reaching 85.91, the weakest since Aug. 19. The currency was at 107.31 per euro from as low as 109.56.
Kan and Finance Minister Yoshihiko Noda are pressing the central bank to stem the yen’s surge on concern the currency’s gain will hurt the nation’s export-driven recovery. Every 1-yen gain against the dollar reduces Toyota Motor Corp.’s annual operating profit by 30 billion yen and Honda Motor Co.’s by 16 billion yen, according to the companies.
“We’re in a severe situation,” Noda told reporters in Tokyo on Aug. 27. “Our basic stance is that we will take appropriate action when necessary.”
Kan said last week he wants the Bank of Japan to implement monetary policy “swiftly” and will talk with GovernorShirakawa on his return from the U.S. Federal Reserve’s annual symposium of central bankers.
Intervention
Gains in the yen stoked speculation the central bank will ease monetary policy further or intervene in the foreign- exchange market by purchasing or selling currencies in an attempt to weaken it. Kan, a former finance minister, said in January the yen should be about 95 per dollar.
Pressure to intervene comes as Kan faces intra-party competition from his most powerful rival. Ichiro Ozawa, who was forced to step down in June as the Democratic Party of Japan’s No. 2 official because of a campaign funding scandal, said he will run against Kan in the Sept. 14 election for party president. The party’s majority in the lower house of parliament ensures its leader becomes prime minister.
The yen’s appreciation may discourage Japanese manufacturers from spending, hurting the labor market and households, said Junichi Makino, senior economist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second- biggest brokerage.
‘Hear Our Wailing’
“I want Tokyo to hear our wailing,” Suzuki Motor Corp. Chairman Osamu Suzuki told reporters last week. “Something needs to be done to prevent Japan from sinking.”
Japan hasn’t intervened in the currency market since March 2004, when the yen was at about 109 per dollar. The Bank of Japan sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The action failed to keep the currency from rising to 102.63 to the dollar by the end of that year.
“What are they going to do? Take on the whole market?” said Scott Ainsbury, a money manager who helps invest about $9 billion at New York-based FX Concepts Inc., the world’s biggest currency hedge fund. “Japanese authorities are mindful of the world economic outlook and they realize that whilst they’d like a weaker yen it’s probably just not going to happen.”
FX Concepts predicts the yen will trade from 75 to 78 per dollar by year-end, he said.
Coordinated Help
Japan would need coordinated help from U.S. and European policy makers to weaken the yen, and that’s unlikely because they want their currencies to stay relatively weak to help bolster exports and keep their own economic recoveries afloat, according to Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest publicly traded lender.
The U.S. economy expanded at a 1.6 percent annual rate in the second quarter, the Commerce Department said Aug. 27, less than its initial estimate of 2.4 percent. The 16-nation euro region’s economy grew 1 percent last quarter, the European Union’s statistics office in Luxembourg said Aug. 13.
“When your options are limited for monetary and fiscal measures, currency policies become your last resort” to spur growth, Karakama said. “Europe and the U.S. clearly favor weaker currencies, so somebody has to take the hit.”
Swiss National Bank
The BOJ may be deterred from intervening alone after the Swiss National Bank failed to prevent the franc from appreciating almost 12 percent to a record against the euro this year, according to Bilal Hafeez, managing director and head of currency strategy at Deutsche Bank in London.
“It’s very unlikely the U.S. would be on board because the Americans have been pressuring the Chinese to stop intervening in the yuan on the one hand, so they can’t allow the Japanese to intervene on the other,” he said.
U.S. lawmakers have accused China of keeping the yuan’s exchange rate artificially low to gain an unfair trade advantage. Treasury Secretary Timothy F. Geithner said Aug. 4 he will “watch closely” how much the yuan is allowed to gain after saying the previous month the currency was undervalued.
U.S. Toleration
The U.S. will tolerate a weaker dollar until institutional foreign investors stop purchasing Treasury notes and bonds, driving up yields and threatening the recovery, said Masaaki Kanno, chief economist in Tokyo at JPMorgan Chase & Co.
Investors outside the U.S. owned $4 trillion of marketable Treasury securities outstanding as of June, up 83 percent from the start of the global financial crisis in mid-2007, U.S. government data show.
Treasury two-year yields fell to a record low of 0.45 percent last week, while 10-year securities dropped to 2.42 percent, the least since January 2009.
“Dollar weakness isn’t bad at all for the U.S. right now,” said Kanno, a former Bank of Japan official. “U.S. policy makers will accept a gradual decline in the dollar, even though they won’t say that officially.”
JPMorgan predicts the yen will strengthen to 79 versus the dollar and 99 per euro by the end of this year.
Japan’s currency will rise to 80 per dollar by the end of the year and “possibly even” 75, Deutsche’s Hafeez wrote in an Aug. 25 research note that cited diverging inflation rates.
Since 1995, Japan’s consumer prices have fallen by an average of 0.1 percent a month from a year earlier, compared with an increase of 2.5 percent in the U.S.
Purchasing Power
“Japan’s deflation and the U.S.’s inflation have seen the yen steadily lose purchasing power,” Hafeez wrote in the report. “We are comfortable with our bearish dollar-yen view.”
U.S. two-year Treasuries yield 38 basis points more than similar-maturity securities in Japan. The difference is down from this year’s high of 1 percentage point in April and the average of 3.22 percentage points since 1990.
Futures traders have boosted bets the yen will rise. The number of contracts hedge funds and other large speculators hold at the Chicago Mercantile Exchange betting on a gain rose to 52,478 this month from a net short position of 65,612 contracts in May, according to Washington-based Commodity Futures Trading Commission data.
The record was 65,920 contracts in March 2008, just before the yen started a rally that pushed it 36 percent higher by the end of that year on a correlation-weighted basis.
“Without a firming in U.S. rates, it’s hard to anticipate yen selling-off pressure,” Osamu Takashima, Citigroup Inc.’s chief currency strategist in Tokyo, and Issei Suzuki, wrote in an Aug. 25 research report.
To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
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