The yen weakened beyond 100 per dollar for the first time in four years as the Bank of Japan’s deflation-fighting measures have the currency headed for its longest streak of monthly losses in almost two decades.
Japan’s currency has dropped 4.3 percent since April 4, when BOJ Governor Haruhiko Kuroda outstripped economist forecasts by pledging to double monthly bond purchases and scoop up longer-term debt to reach a 2 percent annual inflation goal. The currency last traded at 100 on April 14, 2009.
Honda Motor Co. and Mazda Motor Corp. forecast higher profits this fiscal year and the Topix index of shares posted its longest rally since 2005 as Prime Minister Shinzo Abe’s Liberal Democratic Party swept to power in December on a campaign to take unprecedented economic stimulus measures to end 15 years of deflation. The yen’s 13 percent plunge this year, the most among major currencies, has spurred complaints from trading partners concerned it will cost their exporters market share.
“We’re opening up the door to look at 105 in the next few months, and 110 by end of year seems perfectly reasonable,” said Alan Ruskin, global head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, said today in a telephone interview.
The BOJ increased monthly bond purchases on April 4 to exceed 7 trillion yen ($70 billion) at Kuroda’s first policy meeting in charge, exceeding the 5.2 trillion yen forecast by economists in a Bloomberg News survey. It also suspended a cap on some bond holdings and dropped a limit on debt maturities.
Policy makers maintained the unprecedented plan at an April 26 meeting and predicted inflation will almost match their target in two years even after a report highlighted deflation’s grip.
Kuroda told reporters after the second April meeting that policy adjustments would be made if necessary and the bank will keep its stimulus until stable 2 percent gains in consumer prices are realized.
Former BOJ officials have cast doubt on Kuroda’s ability to overcome the drag on the nation’s economy caused by the world’s fastest aging society.
All five ex-Bank of Japan officials in a Bloomberg News survey said any gains in government bond yields will be contained over the next two years, with four of them seeing little chance that the BOJ will achieve its 2 percent inflation target. People 65 or older accounted for 22.1 percent of Japan’s total population in 2007-2011, the highest global proportion, according to Bloomberg Rankings.
“What creates Japan’s deflation is the aging of society,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc. in Tokyo, in an interview in April. “Robust economic growth and business opportunities that provide future income are needed to end deflation. Even if the central bank raises the flag of inflation, whether people will follow it is a different matter.”
Kumano, a 10-year veteran at the BOJ, sees lower Japanese government bond yields in the next two years. A separate poll of 16 economists shows the yield on the benchmark 10-year note may rise to 0.93 percent by September 2014, which would still be the lowest among developed nations, according to separate polls.
Japan’s benchmark government bond yield climbed to O.60 percent today after tumbling to a record 0.315 percent on April 5. It has climbed as Kuroda’s stimulus policies helped send the Topix index of shares to the highest level since Sept. 12, 2008, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy. The stock gauge rose 13 percent in April, the strongest monthly rally since March 1999.
Kuroda and Abe have drawn criticism from other nations that their willingness to do whatever it takes to end deflation are weakening the yen too far, too fast, giving Japan’s exporters an unfair advantage. South Korean Finance Minister Hyun Oh Seok said in April that a falling yen is having a “considerable impact” on South Korea’s economy that’s bigger than threats from North Korea.
Alert to signs of a slowing global economy, Group of 20 finance chiefs and central bankers on April 19 endorsed Kuroda’s stimulus measures, signaling Japan’s focus on supporting domestic demand was strong enough to allow them to ignore the side-effects on their own economies of a sliding yen.
“The cocktail-party rules say that as long as you don’t actually say that your aim is to weaken the currency, then it doesn’t matter if your actions weaken the currency,” Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo, said in a Bloomberg Television interview on April 30. “If you’re printing money, then the yen is going to continue to weaken.”
The yen’s is heading for its eighth-straight monthly loss against the dollar, which would be the longest since a nine-month skid ending in January 1996. The policies of Abe and Kuroda have reversed a trend of currency strength that damped Japan’s corporate earnings and entrenched deflationary pressures for consumers. Investors seeking refuge assets amid Europe’s sovereign-debt crisis and a record earthquake in Japan drove the yen to a postwar high of 75.35 per dollar in October 2011.
Electronics maker Sony Corp. posted an eighth-consecutive quarter of losses in the period ended Dec. 31.
The weaker yen helped Mazda, Japan’s fifth-largest car company, post a profit of 34 billion yen for the fiscal year that ended March 31, compared with a loss of 107.7 billion yen the previous year.
A one-yen change against the dollar, euro, Canadian dollar and Australian dollar has a 9.1 percent impact on Mazda’s operating profit, according to estimates of Bank of America Corp. based on Mazda’s own forecast for the current fiscal year. That compares with 4.7 percent at Fuji Heavy Industries Ltd., which makes Subaru cars, and 3.1 percent at Toyota.
Kuroda said after his first policy meeting that it’s natural for a currency to weaken in response to monetary stimulus, and the BOJ will continue to ease until price growth is sustainable.
Deflation intensified before Kuroda expanded stimulus, with consumer prices excluding fresh food sliding 0.5 percent in March from a year earlier, the most in two years.
The risk is that continued price declines will erode BOJ credibility. The BOJ’s next forecasts are due in October, suggesting another round of stimulus could come that month, according to Barclays Plc.
“Kuroda will probably have to bolster stimulus in October as prices won’t be on the desired track,” said Kyohei Morita, chief economist at Barclays in Tokyo. At the same time, “boosting consumer prices by more stimulus will get harder and harder. His credibility will be at stake.”
The yen will be at 104 per dollar at year-end, according to the median of 55 economist estimates compiled by Bloomberg. Of those polled, 41 saw the currency at 100 yen per dollar or weaker.