Yen Embraced by U.S. Banks as Heir Apparent to Dollar's Throne

Commodities Implosion Boosts U.S. Dollar's Surge
  • JPMorgan, Morgan Stanley see yen beating major peers in 2016
  • Impact of BOJ easing fades as current-account surplus grows

After its steepest losing streak on record, Japan’s yen is poised to seize the crown of best-performing major currency from the dollar in 2016, according to two of the biggest U.S. investment banks.

QuickTake Abenomics

JPMorgan Chase & Co. and Morgan Stanley predict Japan’s currency will outstrip all its peers next year, halting an almost 40 percent decline over the past four years versus the greenback. The nation’s growing current-account surplus is blunting the Bank of Japan’s ability to weaken the exchange rate through monetary stimulus, and the government will increasingly rely on spending and reforms to boost the economy instead, they say.

“We think the yen is going to be stronger than the dollar,” said Calvin Tse, the co-head of U.S. currency strategy for Morgan Stanley in New York. “We are relatively out of consensus in that we don’t expect the Bank of Japan to announce any fresh, balance-sheet expanding, easing measures over the course of the next year.”

Compared with September, more than twice as many analysts now expect the yen to climb to 120 per dollar or stronger by the end of 2016, forecasts compiled by Bloomberg show. Even so, the consensus view is for the currency to remain close to the 13-year low of 125.86 per dollar reached in June, with a median estimate of 125 compared with a level of 123.16 as of 10:35 a.m. London time on Tuesday.

Morgan Stanley predicts the yen will strengthen to 115 per dollar by the end of 2016, while JPMorgan’s call for 110 is the most-bullish forecast among more than 50 compiled by Bloomberg. 

The estimates range from 110 to 135 yen per dollar, underlining the divide among forecasters. That contrasts with the currency’s 10-yen trading range this year, which is the narrowest in percentage terms since 1976.

After falling against its 16 major peers in the three years to 2014, the yen has stabilized this year amid signs the BOJ may be done with expanding its unprecedented monetary stimulus program. Its less-than 3 percent drop against the dollar since last December is a fraction of its 36 percent slide from the end of 2011 through 2014.

“Next year, the yen will become the strongest currency among the Group of 10,” said Tohru Sasaki, head of Japan markets research at JPMorgan in Tokyo. “It’s a bit difficult to expect continuous yen depreciation just on monetary policy easing.”

Forecasts by Sasaki’s JPMorgan team and Morgan Stanley have proved prescient before. At the end of 2014, both banks predicted the yen would trade at 123 in the second quarter, which it ended at 122.5 per dollar. By mid-2015, they estimated a move to 121 by Dec. 31, less than three yen from its current level.

Corporate Effects

A stronger yen would hamper the central bank’s efforts to boost inflation and threaten a run of record corporate profits that have spurred a four-year surge in domestic equities. BOJ Governor Haruhiko Kuroda shifted the focus for stoking inflation and growth to the government in May, saying stimulus “may help structural reform be implemented vigorously.”

While the lower expectations for BOJ easing raise the risks for sharp, short drops in the yen, they also emphasize how the longer-term outlook is for a stronger exchange rate, according to Commonwealth Bank of Australia.

With many traders unprepared, a surprise increase to the BOJ’s stimulus efforts this month or in January may weaken the currency by as much as six yen, said Sydney-based strategist Joseph Capurso.

Trade Effect

But any losses would be short-lived because of Japan’s current-account surplus, he said, particularly as rising U.S. interest rates risk destabilizing emerging markets and stoking appetite for the yen as a haven. Investors expect the Federal Reserve to raise borrowing costs next week.

Japan’s finance ministry reported a 16th consecutive month of surpluses on the broadest measure of trade on Tuesday, as low oil prices and a weak currency boost income from overseas. The excess earnings make the yen less susceptible to overseas shocks, such as the third-quarter rout in emerging-market equities that saw it strengthen more than 2 percent.

“You have these short-term effects from the policy easing, but a huge current-account surplus tends to be a powerful driver for the yen, particularly during crises,” said CBA’s Capurso, who sees the yen ending next year at 119 per dollar. “History shows that the current account is the most important influence over the long run.”

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