Yen Losing Most Since ’95 Not Enough for Toyota

Japanese Yen
Japanese 10000 yen notes are displayed for a photograph in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

For all his success in driving the yen down by the most in 16 years, Bank of Japan Governor Masaaki Shirakawa is under pressure from local companies to weaken the currency even more, while traders anticipate a rebound.

The yen slid 10 percent last quarter versus nine developed-nation peers as the BOJ flooded the economy with 10 trillion yen ($120.9 billion) and set a 1 percent inflation goal, according to data compiled by Bloomberg. Strategists cut third-quarter forecasts for the yen more than any other currency. Now, demand for derivatives to protect against further declines is shrinking, suggesting to traders that a reversal is coming.

Even as Toyota Motor Corp. raised its profit forecast, company President Akio Toyoda -- grandson of the founder -- said the yen needed to fall further to help exports. Efforts by Shirakawa and Prime Minister Yoshihiko Noda to pull Japan out of recession with a weaker currency aren’t being helped by Federal Reserve Chairman Ben S. Bernanke, who’s considering more stimulus for the U.S. economy.

“The Bank of Japan is off to a good start, but pushing it on requires being bullish on the U.S. economy and the potential open-endedness of policy easing in Japan,” Shahab Jalinoos, a senior currency strategist at UBS AG in Stamford, Connecticut, said in a telephone interview on March 27. “When you see a move of the scale that we’ve had, it’s hard to keep moving at that rate.”

‘Still Harsh’

UBS, the third-biggest foreign-exchange trading firm as measured by Euromoney Institutional Investor Plc, expects the yen to weaken to 85 per dollar in the next six months. The currency rose 0.8 percent to 82.25 at 9:43 a.m. New York time.

Toyota, Asia’s biggest carmaker, based last fiscal year’s profit forecast on an exchange rate of 78 yen per dollar, and says it loses about 32 billion yen in operating income for every 1 yen gain against the greenback. Toyoda told reporters in Tokyo on March 22 that “an appropriate level” for the yen is about 95 to 100.

Electronics companies Sharp Corp., Sony Corp. and Panasonic Corp. forecast a combined $16 billion in losses for the year ended March 31, citing falling prices for televisions and the stronger currency.

“A weaker yen is a plus, but the 80-level is still harsh,” Takashi Okuda, the president of Sharp, Japan’s largest maker of liquid-crystal-display panels, told reporters in Tokyo on March 19.

Yen Weakens

The currency dropped to 84.18 per dollar on March 15, the lowest since April 2011. That’s down from 76.91 at the end of last year. Only the Sri Lankan rupee, Iranian rial and New Ghana cedi did worse against the greenback than the yen last quarter, according to data compiled by Bloomberg.

The Bloomberg Correlation-Weighted Index for the yen slid 10.4 percent to 388.73 in the first three months of the year, the most since the third quarter of 1995 and biggest drop of any of the 10 developed-nation currencies tracked by the gauge.

As the yen depreciated, Japan’s Nikkei 225 Stock Average gained more than any other major market share index, surging 19 percent. Japanese government bonds, or JGBs, returned 0.3 percent, according to Bank of America Merrill Lynch data. U.S. Treasuries lost 1.3 percent.

While yields on Japan’s 10-year notes are the second lowest in the world after Switzerland’s, deflation-adjusted returns makes them attractive to foreign investors, who bought yen to boost holdings of JGBs to a record level last year.

Real Yields

So-called real yields on Japan’s 10-year bonds are 0.69 percent, the highest for any Group of Seven nation except Italy.

“Given that Japan remains mired in deflation, its higher real yields will continue to lure overseas investors to JGBs,” Shogo Fujita, chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 25 primary dealers required to bid at Japanese government bond sales, said in a telephone interview on March 29. Ten-year yields may fall to 0.8 percent this year, the least since 2003, he said.

The rate of inflation is showing signs of moving higher after falling an average 0.2 percent per year over the past decade. Japan’s consumer prices rose 0.3 percent in February from a year earlier, following a 0.1 percent gain in the previous month, the statistics bureau said March 30.

Strategist Forecasts

While strategists cut their third-quarter forecasts for the yen against the dollar by 6 percent, the most of any currency pair tracked by Bloomberg, they see it holding at 84 per dollar through year-end. Even after a 9.1 percent slump from its record post-World War II record of 75.35 on Oct. 31, the currency is still stronger than the 10-year average of 104.49.

Options predict an end to the yen’s drop. The three-month, 25-delta risk-reversal rate was minus 0.04 percent on March 30, signaling greater demand for the right to sell the dollar against the yen than to buy the greenback. The premium that investors were paying to protect against a yen decline had been as much as 0.53 percent on Feb. 20, the most on a closing basis in data compiled by Bloomberg back to 2003.

The one-month rate fell below zero for the first time since November last week.

Futures bets that Japan’s currency will fall against the dollar have reached the most extreme since July 2007, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the yen compared with those on a gain, so-called net shorts, was 67,622 on March 27, compared with 25,821 a week earlier. By the end of February, futures traders were net long the yen.

Optimal Level

Japanese exporters can remain profitable as long as the yen is 82 yen per dollar or weaker, a Cabinet Office survey showed on Feb. 28. Large manufacturers expected the currency to trade at 79.02 for the year ended March 31, according to BOJ’s Tankan quarterly survey released in December. The Tankan report released today showed large manufacturers expect an average exchange rate of 78.14 in fiscal 2012.

Nissan Motor Co., Japan’s second-biggest carmaker, sees 2012 as having “less headwinds than last year,” Chief Executive Officer Carlos Ghosn said in an interview on March 26. The yen is “still too strong,” said Ghosn, who has pledged to maintain production of 1 million vehicles in Japan.

“Exporters are clamoring for a weaker yen, but the Cabinet office survey and the Tankan survey suggest you have to take some of those complaints with a grain of salt because both measures suggest Japanese exporters had adjusted to the strong yen in the low 80s,” Ned Rumpeltin, the head of Group of 10 currency strategy at Standard Chartered Plc in London, said on March 28.

Yield Spreads

Standard Chartered expects the yen to strengthen to 77 in the third-quarter and 74 by year-end as investors seek Japan’s real yields and the U.S. recovery stagnates.

Rising U.S. yields may draw more funds into dollar-based securities, helping weaken the yen. Treasury two-year notes yield about 21 basis points more than Japanese bonds of similar maturity. The spread has widened from 1.3 basis points, or 0.013 percentage point, in September.

Even with U.S. unemployment at a three-year low, Bernanke said March 26 that further stimulus may be needed. The Fed bought $2.3 trillion of Treasuries and mortgage-backed bonds in two rounds of purchases from December 2008 to June 2011, flooding the financial system with money and helping to spark a 13 percent decline in the dollar against the euro and a 14 percent plunge versus the yen.

Yen ‘Catalyst’

“If the decline in U.S. unemployment or outperformance of data looks like it’s stalling, then we think talk of additional easing in the U.S. will come back to the forefront and that will be the catalyst” for a yen rally, Ray Attrill, head of currency strategy for BNP Paribas SA in New York, said in a telephone interview March 26.

BNP Paribas says the Japanese currency will appreciate to 80 in the third quarter and strengthen to 78 by year-end.

A continued U.S. recovery would add to yen weakness by pushing more investors to borrow the currency before selling it to buy the foreign exchange of Australia, South Africa, Brazil and Mexico.

So-called carry trades returned 69 percent on an annualized basis last quarter, data compiled by Bloomberg show. Similar purchases funded with euros or dollars earned 11 percent and 25 percent.

Energy Imports

Currency moves that support exporters hurt consumption as energy imports are more expensive. Japan’s nuclear plants lay idle following last year’s record earthquake and tsunami that triggered meltdowns at Tokyo Electric Power Co.’s Fukushima facility.

The country’s current account, the widest measure of trade, turned negative in January for the first time since 2009 as imports of liquefied natural gas surged. Utilities are burning an extra 400,000 barrels a day, according to Deutsche Bank AG.

“The strong yen also supports consumption more broadly and that will be particularly important as Japan becomes a heavy importer of crude oil,” Standard Chartered’s Rumpeltin said.

The BOJ in February more than doubled the size of a fund devoted to buying government notes maturing within two years. The central bank’s inflation goal isn’t enough for some lawmakers in Noda’s ruling Democratic Party of Japan who are asking for a target of more than 2 percent.

The central bank’s board has said it doesn’t want the government to become dependent on it printing money, which may damp expectations for a weaker yen.

“There is a limit to how much the BOJ can do, and simply demanding a weaker yen is wishful thinking,” said Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo. “There’s not much that companies can do but to shift production overseas or come up with strategies and business plans based on the exchange rate in front of them now.”

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