Photographer: SeongJoon Cho/Bloomberg

Yen Under Pressure to Extend World-Beating Rally Against Dollar

  • Credit Suisse sees potential for yen to reach 90 per dollar
  • JPMorgan sees friction with U.S. leading to further rallies

The yen’s world-beating rally against the dollar looks to be gathering momentum, as central bank inaction on both sides of the Pacific Ocean leaves inflation expectations to drive the exchange rate.

Japan’s currency extended its climb to an 18-month high Monday after Bank of Japan Governor Haruhiko Kuroda refrained from adding to stimulus on Thursday. That took its gain this year to 13 percent, the most among developed-market peers. The BOJ’s decision came just hours after Federal Reserve Chair Janet Yellen frustrated dollar bulls by reiterating she’s in no rush to cool the economy by raising interest rates. JPMorgan Chase & Co. sees further yen gains after the U.S. put Japan on a new currency watch list.

With consumer price pressures building in the U.S. and dissipating in Japan, that narrows the gap in so-called real yields -- the returns an investor can expect after accounting for inflation -- supporting yen strength. If both central banks stay on the sidelines, Credit Suisse Group AG projects Japan’s currency could rapidly appreciate toward 90 per dollar.

“So long as the Fed signals that they are being cautious in raising rates, real yields in the U.S. will decline, leading the dollar weaker,” said Hiromichi Shirakawa, the Swiss lender’s chief Japan economist and a former BOJ official. “The currency market is in a rather dangerous zone.”

Inflation Expectations

The BOJ’s benchmark for measuring progress toward its 2 percent target showed prices retreated at an annual 0.3 percent pace in March, the biggest decline since April 2013, the month that Kuroda initiated his stimulus program. It had previously hovered near zero for more than a year.

By contrast, the Fed’s preferred measure of inflation, based on the prices of goods and services consumers buy, rose 0.8 percent in the year through March. The so-called core measure, which strips out food and energy prices, climbed 1.6 percent.

That’s seen a Treasury market gauge of inflation expectations over the coming decade -- called the break-even rate -- jump to 1.7 percent from as low as 1.2 percent in February. The equivalent measure in Japan is languishing at 0.3 percent.

Benchmark 10-year Treasury Inflation Protected Securities yield around 0.1 percent, compared with about minus 0.5 percent for equivalent Japanese notes.

Best Start

The yen has kicked off to its best start to a year in more than two decades amid increased demand for haven assets in an environment of uncertain global growth. The currency strengthened to as high as 106.14 per dollar Monday, the strongest since October 2014. It was at 106.64 as of 12:29 p.m. in Tokyo.

Japanese markets were closed on Friday for a national holiday, and will be shut for holidays on Tuesday, Wednesday and Thursday this week.

“Based on the global economic conditions and investors’ risk sentiment, the major trend in the fundamentals is for a stronger yen,” said Shinichiro Kadota, a Tokyo-based foreign-exchange strategist at Barclays Plc. “We see fair value at around 95 to 100 and it will head toward that level.”

Japanese Finance Minister Taro Aso said Saturday that one-sided speculative movements in the dollar-yen rate are “extremely concerning,” and officials “will act if necessary,” according to a transcript obtained by Bloomberg. He also said the U.S. currency watch list does not limit Japan’s currency response.

U.S. Watch List

Japan met two of three criteria used to judge unfair practices in the U.S. report: a trade surplus with the U.S. above $20 billion, and a current-account surplus amounting to more than 3 percent of gross-domestic product. The third would be a repeated depreciation of the currency by buying foreign assets equivalent to 2 percent of gross domestic over a year.

Meeting all three would trigger action by the U.S. president to enter discussions with the country and seek potential penalties. China, Germany, South Korea and Taiwan also made the watch list.

JPMorgan’s head of Japan markets research, Tohru Sasaki, says yen selling worth 2 percent of GDP is not enough to support the currency against the dollar. Instead, the former BOJ official sees friction between the Japanese and U.S. governments as capable of pushing the yen beyond 100 per dollar by year-end.

“If both sides are saying different things, the market will think there is no coordination, which means the market will become uncertain, and then unstable,” leading investors to buy the yen as a haven, he said. “Intervention can’t stop it.”

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