Yen Splits Top Forecasters as Japanese Officials Express Unease

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The yen’s slide to a 12-year low against the dollar has the top forecasters and dealers of the Japanese currency divided on how much weaker it will get.

Ebury Partners Ltd., the most-accurate yen forecaster in the first quarter based on data compiled by Bloomberg, sees it tumbling to 132 per dollar this year, from as weak as 124.46 on Thursday. Nomura Holdings Inc., which placed second in the rankings, and Bank of Tokyo-Mitsubishi UFJ Ltd. Japan’s biggest lender, say it will struggle to depreciate much beyond 125.

At the heart of the disagreement is the extent to which the twin drivers of the yen’s decline -- Bank of Japan easing and an anticipated U.S. interest-rate increase -- are already reflected in the exchange rate’s 30 percent decline since the end of 2012. Recent comments underlining the policy split from officials in both nations pushed the currency out of the narrow range it was stuck in for most of this year.

“The BOJ will be forced to take additional easing at some point this year,” said Enrique Diaz-Alvarez, chief risk officer in New York at Ebury, which provides financial services to small and medium-sized companies. “We see the selloff” in the yen “picking up steam in the fourth quarter because markets don’t really react to Federal Reserve hikes until they actually happen,” he said.

Disappointing Data

Strategists contributing to Bloomberg’s yen survey have left the median year-end forecast of 125 unchanged since February after disappointing U.S. economic data saw the chances of an early boost to the Fed’s near-zero main rate diminish. Japan’s currency stayed in a range of just 2.3 yen in April, the narrowest since July.

The yen snapped out of its torpor on May 22, when Fed Chair Janet Yellen said she expected to raise borrowing costs this year. On Wednesday, BOJ Governor Haruhiko Kuroda reiterated that he’ll adjust his 80 trillion yen ($646 billion) annual stimulus program if needed.

“For dollar-yen, I think it can continue to go higher, but the upside may be getting limited,” said Charles St-Arnaud, senior economist and strategist at Nomura in London. Any further losses in Japan’s currency are “likely to come mainly from a stronger U.S. dollar, with better U.S. data leading to a repricing of the timing of the rate lift-off.”

St-Arnaud said the Japanese bank is sticking with its forecasts for the yen to remain little changed at 125 to the dollar by December before weakening to 130 by the end of 2016. It strengthened to 123.69 per dollar as of 6:06 a.m. New York time on Friday.

Bear Camp

Ebury has company in the bear camp. Yuji Saito, director of foreign exchange in Tokyo at Credit Agricole SA, said “markets may get a sense of achievement once 125 yen is hit,” leading to “a further drop.”

The differing views reflect the mixed messages seen in the options market. The currency’s three-month risk-reversal rate reached a two-year high this week, signaling further losses. Yet at 0.7 percentage point, the spread between contracts to sell or buy is the second smallest among 16 major currencies tracked by Bloomberg, suggesting declines may be limited.

Japanese officials including Chief Cabinet Secretary Yoshihide Suga have expressed concern about the pace of the yen’s decline, while stopping short of calling for a halt. U.S. Treasury Secretary Jacob Lew, who spoke with Japanese Finance Minister Taro Aso at a Group-of-Seven finance ministers meeting in Dresden, Germany, said countries shouldn’t target exchange rates for competitive purposes.

Months Away

Strategists who say the yen has bottomed justify their view by pointing out that a Fed rate increase is still months away. Even after Yellen’s comments, traders only put the chance of an increase by September at 27 percent, according to data from CME Group Inc.

“Dollar-yen may be now near its peak,” said Minori Uchida, head of global-market research at Bank of Tokyo-Mitsubishi. “It’ll be difficult for the pair to break 125” because it’s “doubtful” there’ll be further rate signals from the Fed to maintain its momentum, he said.

Citigroup Inc., the world’s largest foreign-exchange dealer, predicts a level of 126 per dollar by year-end.

“If you take a look across currencies, the yen is the only one that’s broken out of ranges, and I think a lot of investors are playing the breakout trade without having a very firm idea about how far it can go,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup in New York. “Above 125 it could struggle.”

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