The yen may weaken to “infinity” versus the dollar as central bank policies in Japan and the U.S. diverge, according to Axel Merk of Merk Investments LLC.
The Bank of Japan’s unprecedented bond-buying program designed to reach an inflation target of 2 percent in two years, combined with the Federal Reserve’s forecast trimming of monthly bond purchases, is putting pressure on the yen, said Merk, who oversees about $635 million of currencies as founder and president of Palo Alto, California-based Merk Investments.
“The biggest fear that I have is that some of the policies we have are working, be it in U.S. or Japan,” Merk said in an interview yesterday on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee. “That means that yields are going to spike -- it means that we cannot afford government deficits. In Japan, it’s very clear that the Bank of Japan is going to jump in to put a lid on that, and there the yen has to cave in.”
The objective of Merk’s $373 million Hard Currency Fund is to protect against the depreciation of the U.S. dollar relative to other currencies. The fund has gained 2.3 percent in the three years to yesterday, outperforming 92 percent of its peers, according to data compiled by Bloomberg.
Japan’s currency slid 0.1 percent to 99.66 per dollar as of 1:41 p.m. in Tokyo. That compares with an average of 99.71 in the past decade.
The yen touched 100.61 on Sept. 11, the weakest since July 22. It has declined 13 percent versus the dollar this year, making it the worst second-worst performer among the greenback’s 16 most-traded counterparts.
The yield differential between U.S. and Japanese government securities reached its widest in almost two and a half years as the respective monetary policies diverge. Treasuries due in 10 years yielded 2.22 percent more than similar maturity Japanese sovereign debt on Sept. 10, the biggest premium since April 2011, according to data compiled by Bloomberg.
Japan’s Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda have implemented a bond-buying program to help combat years of deflation. Abe will probably decide on Oct. 1 whether to raise the sales tax to 8 percent in April from 5 percent now, Economy Minister Akira Amari said on Sept. 9.
Officials are considering a reduction in the levy on corporate income as part of a stimulus package to cushion the economy from the planned increase, according to three people briefed on the matter who asked not to be identified as the discussions aren’t public.
“They’re going to spend, they’re going to tax, they’re going to print money,” Merk said. “It’s going to feel great for a while, but that cannot have a good ending.”
The yen will probably be at 103 per dollar by Dec. 31, according to the median estimate in a Bloomberg survey that shows Royal Bank of Canada’s forecast for 92 as the most bullish for Japan’s currency among 63 estimates, while Ebury Partners Ltd. and and UniCredit SpA predict it will weaken to 115.
The currency will see a trough of 110 by the end of 2014 before recovering to 102 two years later, the poll shows.
“We continue to think the outlook for the Japanese yen is more balanced than the extremely bearish consensus forecasts,” analysts led by Adam Cole, the London-based head of Group-of-10 currency strategy at RBC, wrote in a Sept. 6 report. “With little evidence that BOJ easing has so far generated any yen selling pressure from within Japan, however, our near-term forecasts continue to be dominated by the steady erosion of yen shorts.” A short is a bet an asset will decline.
The Fed this month will taper its monthly bond purchases to $75 billion from the current $85 billion pace, according to the median estimate of 34 economists surveyed Sept. 6 by Bloomberg News. The yield on U.S. government debt due in a decade was at 2.93 percent after exceeding 3 percent on Sept. 6 for the first time since July 2011.
“I do think infinity is perhaps a little extreme,” Andrew Salter, a Sydney-based currency strategist at Australia & New Zealand Banking Group Ltd., said in a Bloomberg Television interview today. “Our take on the yen is that a lot of the reflation in the domestic economy has been priced into the market. We think the next leg up in the yen really comes from increasing U.S. Treasury yields,” said Salter, who predicts the yen will weaken to 105 by the end of 2013.
The euro may rise to $1.40 this year, Merk said, echoing his comments in February. The 17-nation currency has risen 0.7 percent in 2013 to $1.3278, the biggest advance after the Danish krone among the dollar’s major counterparts.