Yen Intervention Looks Futile for JPMorgan After Picking Rally

Yen Strongest Since October 2014
  • Sasaki says currency will rise to 103 per dollar by year-end
  • Intervention risk rises when yen above 110: RBS's Mohi-uddin

JPMorgan Chase & Co.’s Tohru Sasaki predicted the world-beating surge that carried the yen to a 17-month high. Now the former Bank of Japan official says the government will be reluctant to intervene to stem the currency’s advance -- especially as such a move would probably be futile.

Exporters bringing cash home are the main driver of the yen’s 11 percent rally against the dollar this year, not speculators, so selling the currency to weaken it would be ineffective, said Sasaki, head of Japan markets research at JPMorgan in Tokyo. He forecasts a gain to 103 yen per dollar by year-end. He also sees attempts by officials to talk the currency lower as counterproductive.

“If you only shoot blanks, it just makes a sound -- at first everyone is surprised, but once they get used to it, it’s just noise,” said Sasaki, who’s been the most accurate forecaster of the yen this year. More jawboning will encourage speculators to buy the yen on dips against the dollar, he said.

The yen jumped as much as 1.9 percent on Thursday to 107.92 per dollar, the strongest level since Oct. 28, 2014, even as Japanese officials again aired their concerns.

Chief Cabinet Secretary Yoshihide Suga said for a third successive day the government is watching yen movements with vigilance, adding in his latest comments that the authorities will act appropriately if necessary. That echoed remarks from a Ministry of Finance official earlier in the day. BOJ Governor Haruhiko Kuroda said Tuesday he would keep monitoring foreign-exchange markets.

Accurate Prediction

Sasaki, who worked at the BOJ for a decade before joining JPMorgan in 2003, predicted in December that the yen would strengthen to 110 by the end of 2016. At that time, it was weaker than 120. His forecast was the most bullish among those compiled by Bloomberg. He also flagged the risk it may appreciate to 100, while predicting a spike in early April when Japanese companies repatriate funds at the turn of the fiscal year.

The yen has appreciated versus the greenback in April in four of the past five years. Since the end of the first quarter, it’s up at least 2.9 percent against all its 31 major peers.

The reaffirmation of Group-of-20 members in February that they will refrain from competitive currency devaluations also ties Japan’s hands before it hosts a Group-of-Seven summit next month, Sasaki said.

Gaining Momentum

The yen’s rally picked up momentum in April, undermining Kuroda’s attempts to stoke inflation and thwarting his expectations that introducing negative interest rates in January would weaken the exchange rate. The currency’s surge has put traders on alert for intervention because it’s rebounded to where it was before the central bank boosted stimulus on Oct. 31, 2014.

Japanese officials have previously used the terms “undesirable” and “excessive” to show a heightened risk of intervention, culminating in such warnings of “decisive action.” The last time Japan sold the yen to restrain gains was in 2011, in a multilateral intervention following the devastating March earthquake and tsunami.

The central bank’s decision to start charging interest on some deposits it holds drove the yen down for just one day when it was announced on Jan. 29.

Markets are testing the Japanese government’s resolve to intervene amid speculation that such action won’t be easy, said Yousuke Hosokawa, head of foreign-exchange sales at Sumitomo Mitsui Trust Bank Ltd. in Tokyo.

Rising Surplus

Japan’s current-account surplus -- the broadest measure of trade flows -- has surged by the most in at least three decades, relative to the overall economy, boosting the yen’s appeal for investors seeking safety this year as global stocks lost as much as $9 trillion.

The surplus swelled to 3.3 percent of the nation’s gross domestic product in the final quarter of 2015, from a 0.1 percent deficit in the three months ended Sept. 30, 2014, data compiled by Bloomberg show. Companies selling abroad and then repatriating cash is important because exports account for about 18 percent of Japan’s real GDP.

This is not the first time Sasaki has proved prescient with a contrarian call on the yen. In late 2013, as the currency headed for its biggest annual decline in 30 years, he correctly predicted the rally in the first half of 2014.

While Kuroda and other officials have voiced a preference for a stable exchange rate, they may be more concerned about the yen strengthening than about its volatility, according to Bank of New York Mellon chief currency strategist Simon Derrick.

Greater Risk

“With the yen testing its recent highs against the dollar and a history of sharp price movements from these levels over the past quarter of a century, it will be worth watching what words Japanese officials start using to describe the price action,” London-based Derrick wrote in a note to clients.

The risk of intervention rises significantly as the yen strengthens into a range of 105-110 per dollar, according to Mansoor Mohi-uddin, a strategist at Royal Bank of Scotland Group Plc in Singapore, who correctly predicted in October that the yen would strengthen.

Nevertheless, like Sasaki, Mohi-uddin questioned whether intervention would be successful at the current level.

“Tokyo has bought dollar-yen as high as 125 in 2002,” he said. “But its actions have only fully reversed dollar-yen weakness when the pair has been trading at historic lows -– at 79 in 1995 and 75 in 2011 -- or when the Fed starts hiking interest rates -- as occurred in 1999 and 2004.”

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