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Yen Contrarian JPMorgan Joins Consensus Victorious: Currencies

Japanese yen
The yen failed to extend its almost 17 percent slide last year versus the basket as the Bank of Japan refrained from printing more money to expand 70 trillion yen ($687 billion) of annual asset purchases and as the impact of government spending waned. Photographer: Akio Kon/Bloomberg

JPMorgan Chase & Co., whose contrarian call late last year that the yen would rally in the first half of 2014 has proved prescient, is sticking with its forecast for a second-half rout.

Tohru Sasaki, the company’s Tokyo-based head of Japan rates and currency research, said he senses Prime Minister Shinzo Abe’s structural reforms, which include corporate tax cuts, will bear fruit. That’s the last of the so-called three arrows of Abe’s road map for breaking the economy free from persistent deflation and slow growth. The first two are fiscal stimulus and record monetary easing.

“Global investors are obviously very disappointed in Abenomics right now, but the third arrow is still moving forward,” Sasaki, 46, said by phone on May 23. “If the Japanese economy is getting stronger, then Japanese investors become more confident in the future and take more risks, and invest more in foreign assets,” weakening the yen, he said.

Betting on a lower yen has been one of the biggest losing trades in global markets this year, along with calls for higher bond yields, as the global economy failed to strengthen as much as forecast and geopolitical events including Ukraine’s conflict with Russia flared. The yen -- a haven in times of crisis -- gained 3.1 percent against 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes this year, while the dollar and euro have fallen.

Third Arrow

The yen failed to extend its almost 17 percent slide last year versus the basket as the Bank of Japan refrained from printing more money to expand 70 trillion yen ($687 billion) of annual asset purchases and as the impact of government spending waned.

Abe has also been perceived as slow to reveal his structural reforms. The nation’s economy will probably expand 1.35 percent this year, compared with 2.5 percent in the U.S., surveys by Bloomberg show. The Wall Street Journal quoted BOJ Governor Haruhiko Kuroda as saying there are limits to the central bank’s ability to spur growth.

“There has been considerable disappointment in the third arrow,” Steven Englander, the New York-based global head of Group of 10 foreign-exchange strategy at Citigroup Inc., wrote in a note to clients on May 23.

The fell 0.2 percent today to 102.11 per dollar at 12:27 p.m. in New York, compared with this year’s weakest level of 105.44 on Jan. 2. In December, when the median estimate of analysts surveyed by Bloomberg was for the currency to depreciate to 104 by the end of June, Sasaki said it would actually reach 100.

Easing Expectations

Sasaki, a former central-bank official, now expects the currency to finish the year at 106, similar to his forecast in December and a level unseen since October 2008. Analysts in the latest Bloomberg survey see it dropping to 107 by Dec. 31.

There’s still a chance the yen will extend gains in coming weeks, according to Sasaki. While 44 percent of 32 economists surveyed by Bloomberg forecast the BOJ will add to stimulus in July, including those at JPMorgan, Sasaki said that will have little power to weaken the currency. Instead, he sees potential for a lack of action to boost the yen to 97.

“Whatever comes from the BOJ will not be as powerful as last year, so markets will probably be disappointed, and will be forced to unwind yen short positions,” said Sasaki, who worked at the central bank from 1992 to 2003. “Even if the BOJ does something in July, it’s already priced in.” A short position is a bet an asset will decline.

Abe’s Ninja

The difference in the number of wagers by hedge funds and other large speculators on a drop in the yen versus the dollar compared with those on a gain -- known as net shorts -- fell to 53,787 on May 20, the least since November 2012, figures from the Washington-based Commodity Futures Trading Commission show. The net shorts reached 143,822 on Dec. 24.

The BOJ has been buying about 7 trillion yen of sovereign debt a month since Kuroda started the so-called quantitative and qualitative easing program in April last year, and refrained from adding stimulus in a meeting on May 21.

Sasaki expects Abe to make progress on structural reforms, such as a proposed corporate tax cut and relaxing regulations for business, that he says will, over time, boost corporate profits and improve investors’ risk appetite.

“The first and second arrows were big injections of pain killer but the third arrow is like acupuncture, with many small needles,” Sasaki said. “It takes time and it’s hard to see the effects but eventually it improves your health.”

That’s a view shared by Societe Generale SA, which sees the yen weakening to 110 per dollar in a year as Abe’s changes take hold and the Federal Reserve reduces stimulus.

“The third arrow is like a ninja -- you cannot see it but it’s there,” Takuji Aida, the French bank’s chief economist in Tokyo, said in phone interview today. “The growth strategy is something you will feel the impact of very gradually, over a long period of time.”

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