The yen will rally to 100 per dollar in the first half of next year because the Bank of Japan won’t be able to expand monetary easing by enough to repeat this year’s success, a former central bank official said.
The so-called Kuroda Shock in April set off the yen’s biggest drop since October 2008 and pushed 10-year yields to a record low after BOJ Governor Haruhiko Kuroda pledged to double the monetary base to achieve a 2 percent inflation target. The central bank won’t be able to spring a similar surprise on the market next year, said Tohru Sasaki, who worked at the central bank from 1992 to 2003 and is now JPMorgan’s Tokyo-based head of Japan rates and currency research.
“Next time the BOJ can’t beat market expectations,” he said in an interview on Dec. 5. “It’s already done so much.”
Kuroda will increase total debt buying by 10 trillion yen ($97 billion) for the 12 months ending March 31, 2015, from the current pace of 7 trillion yen a month, at the BOJ’s April 30 meeting, JPMorgan predicts. He will double purchases of exchange-traded funds to 2 trillion yen a year, JPMorgan says. Nineteen economists in a Bloomberg News poll in October said the BOJ will add stimulus in the second quarter of next year, with seven saying it will ease in the July-September period.
The yen will reach as low as 104 per dollar before the BOJ’s April meeting, after which investors disappointed by the scope of Kuroda’s policy announcements are likely to buy back the Japanese currency, Sasaki said.
Demand for the yen may wane again during the second half, driving it down as low as 110 by year-end, should Japan maintain economic growth amid a global recovery, Sasaki said.
Japan’s currency was at 103.02 per dollar as of 6:40 a.m. in London, after reaching a five-year low of 103.74 in May. Benchmark 10-year yields were little changed at 0.66 percent.
The yen tumbled 3.4 percent on April 4, when Kuroda announced his easing measures. Japan’s benchmark 10-year government bond yield plunged to touch a record 0.315 percent on April 5, from 0.56 at the end of March.
The Nikkei 225 Stock Average gained for a second day, advancing 2.3 percent, while the Topix rose 1.6 percent.
Japan’s economy will expand 3.6 percent this quarter from the previous period, and accelerate to 4.8 percent growth at the start of 2014, according to the median estimate of economists polled by Bloomberg News.
Economic growth slowed to an annualized 1.1 percent in the third quarter, weaker than the 1.9 percent initial estimate and down from the 3.6 percent expansion in the three months ended June 30, the Cabinet Office said today in Tokyo. Japan’s current account registered a 128 billion yen shortfall, the first deficit since January, according to the finance ministry.
A consumption tax increase in April will pose a major challenge to Japan’s economy, which JPMorgan expects will shrink 4.5 percent in the second quarter.
“The key point for the Japanese economy is the third quarter and the fourth quarter, if it goes back to a positive number or not,” Sasaki said. “Japan is expected to be a strong country. That’s why the yen is weakening.”