Yen Surge to Eight-Month High Versus Euro Imperils Kuroda Legacy

  • Japan's currency will rise to 114 per euro in 2016, BofA says
  • Gains helped slow exports by most in 3 years in November

The yen’s first annual gain versus the euro since 2011 is cementing speculation that the currency’s lows are behind it, dealing a blow to Japan’s struggling exporters.

Under the most bullish analyst forecast -- Bank of America Corp.’s -- the yen would this year undo all of its losses since the Bank of Japan unleashed record monetary easing in 2013. The currency has surged to the highest level since April as a plunge in stocks boosts demand for safer assets. Its strength may already be making Japanese exports less competitive, with shipments falling the most in almost three years in November.

The turnaround in the currencies’ fortunes reflects concern that Japan’s policy makers have little room to add to stimulus, while the European Central Bank continues to expand the money supply to boost growth. The potential pain for exporters including Toyota Motor Corp., the world’s biggest automaker, and Nissan Motor Co. threatens BOJ Governor Haruhiko Kuroda’s efforts to boost the economy, which is just starting to banish the deflation that blighted the nation for much of the past quarter-century.

“The yen is already weak enough, while the euro has scope for further devaluation,” said Shusuke Yamada, a currency strategist at Bank of America’s Merrill Lynch unit in Tokyo. “The Bank of Japan faces increasingly limited easing options.”

Bank of America predicts the yen will strengthen 11 percent by Dec. 31 to 114 per euro, extending last year’s 11 percent advance and taking it back to levels last seen in January 2013. That’s three months before the BOJ announced it would start unlimited stimulus -- which tends to weaken a currency -- by boosting its asset-purchase program.

Consensus View

The median forecast of 50 strategists surveyed by Bloomberg puts the yen at 131 per euro by year-end, stronger than the prediction of 137 in mid-November. Japan’s currency climbed to 127.76 on Tuesday, the strongest level since April 21. It has climbed from a post-crisis low of 149.78 set in December 2014.

The yen has strengthened beyond the euro levels cited in recent months by Toyota and Nissan when calculating their profit forecasts.

Analysts see the yen dropping 5 percent against the dollar this year, after staying little changed in 2015 and losing more than a third of its value over the previous three years.

Waning Hopes

A divergence in monetary policy is driving Japan’s currency higher versus the euro.

The BOJ left its main bond-purchase program unchanged on Dec. 18, and will refrain from expanding it for the foreseeable future, according to almost half of respondents to a Bloomberg survey last month. The ECB unveiled a package of stimulus measures on Dec. 3, extending its quantitative-easing program and cutting one of its key interest rates.

“The yen seems to be under the strongest pressure to rise among the three majors, which weakens Japan’s export competitiveness,” said Yuji Kameoka, chief currency strategist at Daiwa Securities Co. in Tokyo.

Japan’s exports fell 3.3 percent in November from a year earlier, the most since December 2012, the Ministry of Finance said last month. Shipments to Europe were down 45 percent from their peak in March 2008, while the stronger yen helped imports recover by 18 percent over the same period.

Broader Threat

The yen’s advance threatens more than just exports, with a weaker currency crucial to increasing growth and consumer prices. Prime Minister Shinzo Abe handpicked Kuroda to head up the BOJ in 2013 and carry out the monetary easing that’s a key part of the so-called Three-Arrows policy, aimed at reviving the world’s third-largest economy.

Japanese consumer prices rose just 0.8 percent in 2015, economists surveyed by Bloomberg predict, down from a 23-year high of 2.7 percent in 2014.

“Any difference in the speed and timing of monetary policy will be a bigger driver for euro-yen than the economy or actual monetary policy direction,” said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co., adding that Japan’s currency may appreciate to 125 per euro by year-end. “The probability is higher for the ECB to add stimulus before the BOJ.”

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