Yen Gain to 100 Seen by Strategist Who Called Two Bond Rallies

  • 10-year yield seen falling past record low of 0.195% by March
  • Fed rate move delay, no BOJ extra easing to boost yen: Sano

“Markets will realize the difficulty of successive rate hikes by the Fed by the end of the year, while receding expectations for more BOJ easing will put pressure on the yen to strengthen,” Sano said at a Tokyo seminar on Oct. 8. “The probability is quite high of the yen appreciating above 100 by the end of the fiscal year” in March, he said.

Japan’s benchmark bonds have rallied for five weeks amid debate over whether the BOJ will add to easing at its Oct. 30 meeting, after leaving unchanged its policy of increasing the monetary base at an annual pace of 80 trillion yen ($672 billion) earlier this month. Sano correctly predicted the bull runs that drove yields to the record lows of 0.315 percent in April 2013 and 0.195 percent in January this year.

The case for a stronger yen is backed by the historical difference between yields on Treasuries and Japanese government notes, according to Sano. Japan’s currency was at 119.05 yen per dollar as of 11:03 a.m. in Tokyo Thursday, while the spread between two-year yields was at 55 basis points. By comparison, past patterns suggest the yen should be trading at 120 per dollar when the gap is about 200 basis points, he said.

“Something that moved away excessively from fair value could be corrected sharply,” said Sano, who had forecast that the yen would gain beyond 85 per dollar last year.

Target Obstacle

The yen has lost more than a fifth of its value against the dollar since BOJ Governor Haruhiko Kuroda started a bond-buying program in April 2013 aimed at achieving 2 percent inflation in two years. Consumer prices excluding fresh food, the BOJ’s main gauge for the cost of living, fell 0.1 percent in August from a year earlier.

Falling commodity prices pose a threat to the BOJ’s inflation target, said Takenobu Nakashima, a quantitative strategist at Nomura Securities Co. in Tokyo. Crude oil futures have dropped more than 40 percent over the past year, while a Bloomberg index of commodities has plunged almost 25 percent.

“The weakness in commodities markets is expected to continue,” said Nakashima, who said speculation the BOJ will expand easing has flattened Japan’s yield curve. “The pace of decline in oil prices will slow and ease downward pressures on consumer prices but their rebound will not be sharp enough to push up CPI.”

When the 10-year JGB yield falls to a record low this time, the decline will be gradual, according to Tokai Tokyo’s Sano. The yield is likely to stay below 0.55 percent this fiscal year, he said.

Japan’s benchmark yield will end March at 0.46 percent, while the 10-year Treasury yield moves to 2.46 percent, according to Bloomberg surveys of economists that give more weight to the most recent forecasts. As of Thursday, the yield was at 1.99 percent in the U.S. and 0.305 percent in Japan.

“U.S. Treasury yields are unlikely to rise so there is no choice for investors but to buy JGBs,” Sano said. “I expect only one Fed rate hike. The dollar strength will undergo a correction and so will the yen weakness.”

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