The yen weakening to 130 per dollar isn’t an unreasonable prospect given the Bank of Japan’s intent to beat deflation and double the nation’s monetary base, according to Goldman Sachs Group Inc.’s Jonathan Beinner.
“We think this is a real change in policy and that it will be effective in weakening the yen,” Beinner, Goldman Sachs Asset Management’s chief investment officer of global fixed income, said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhl. The yen at 130 “is not an unreasonable place to be. I’m not looking for that in the very near term. But that is a distinct possibility.”
The yen last traded at 130 to the dollar in April 2002.
The BOJ said April 4 it will double monthly bond buying to 7.5 trillion yen ($76 billion), while suspending a cap on holdings and ending a three-year maturity limit on purchases. The government’s goal of 2 percent inflation is achievable in two years, Governor Haruhiko Kuroda told reporters. Japan is struggling to pull out of its third recession in the past five years and 15 years of deflation.
Yields on Japan’s 10-year government notes tumbled to a record low of 0.325 percent on April 5 before rebounding. The yen has dropped 6.8 percent since the BOJ decision, reaching 99.77 per dollar, the weakest since April 2009.
The 10-year note yield rose six basis points, or 0.06 percentage point, to 0.58 percent in New York trading today, while the yen weakened 0.7 percent to 99.75 per dollar.
Kyle Bass, whose Dallas-based hedge-fund firm Hayman Advisors LP made $500 million in 2007 betting against U.S. subprime mortgages, said on Bloomberg Television yesterday Japanese government bondholders’ reaction, with yields sliding and rebounding, is an early sign of a market collapse.
Goldman’s Beinner also saw some concern for Japanese government bonds as the BOJ follows the Federal Reserve’s strategy of buying bonds to stimulate the economy.
“The markets really went haywire,” Beinner said today. The Bank of Japan “means what they say, that they want to get 2 percent inflation. They are trying to out-Fed the Fed. You are seeing markets just not even know how to handle that.”
The Fed has purchased more than $2.5 trillion of bonds since 2008 in its quantitative-easing strategy and is currently buying $85 billion of Treasury and mortgage debt a month. The central bank has kept its target rate for overnight loans between banks in a range of zero to 0.25 percent since 2008.
Long-term Treasury yields are well below where models based on the pace of economic growth would project because of the amount of debt the Fed has purchased, raising the risk of a “bubble”, Beinner said. Treasury 10-year notes yielded 1.78 percent today, below the 10-year average of 3.6 percent.
“If there is a bubble, it’s the government-bond market that’s a bubble, not the credit market,” Beinner said. “Even though the short-term interest rate is at zero, and obviously the economy is not booming, yet we think the existence of quantitative easing and huge purchase by the Fed at the long end has probably driven rates down 100 to 150 basis points more than they would be even given the current economic environment.”
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