Yen Forecasters Catch Up After Haven Rally Upends Predictions

Japanese Yen Sees Biggest 2-Day Decline Since Nov. 2014
  • Market turmoil boosts buying, wrongfooting most strategists
  • Currency market awaits signals on more stimulus in Japan

Yen forecasters are finally catching up with the market.

After months of chasing the Japanese currency’s rally, analysts’ median year-end estimate stands at 105 yen against the dollar, close to Wednesday’s exchange rate at about 104. It wasn’t always so. At the start of 2016, strategists predicted the yen would fall 3 percent this year. Instead, it strengthened as investors sought refuge assets amid concern about slowing global growth stemming from China and the U.K.’s vote to depart the European Union. 

“For the vast majority of the year, the yen has been surprisingly strong,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, which was ranked the fourth-best forecaster of major currencies in the second quarter. “As we’ve had periods of volatility, especially around China and the U.K. referendum, the yen has displayed the cleanest and purest safe-haven characteristics.”

The bank sees the yen heading to 105 against the dollar in the next six months, Bennenbroek said.

As demand for haven assets dissipated this week, the yen has fallen, providing welcome news to government officials who would prefer a weaker currency to boost exports and stoke inflation amid a slowing global economy. Even with the Bank of Japan’s bond-buying and a negative-interest-rate policy, the currency has strengthened 15 percent this year versus the dollar as investors sought safety in turbulent markets.

The yen rose 0.2 percent to 104.48 per dollar as of 5 p.m. New York time. It slid about 4 percent in the previous two days. Japan’s currency fell 0.1 percent to 115.87 per euro, leaving it down more than 4 percent this week.

For more on the yen’s stunning surge, click here.

Signs that policy makers from Tokyo to London would respond with stimulus to prevent a Brexit-driven slowdown pushed the yen down more than 3 percent in the past week. The Japanese currency had its biggest two-day drop against the dollar since November 2014 after Prime Minister Shinzo Abe said he planned to add fiscal stimulus after his victory in last weekend’s upper house election.

The Bank of Japan’s next policy statement is due July 29, and an adviser to Abe was quoted as saying that would be the time to expand stimulus. The yen has other challenges, too: the nation’s cabinet office cut its forecasts for growth in the fiscal year from April to 0.9 percent, compared with a January estimate of 1.7 percent.

“It’s going to be tough, even if they do stimulative policies, to maintain a weak yen,” said Jason Schenker, president and chief economist of Prestige Economics LLC in Austin, Texas. That’s because the pound and euro will come under pressure from Brexit-related uncertainty, while a dovish Federal Reserve will weigh on the dollar relative to the yen, he said.

“The other ships are taking on water and the yen is floating alone -- it becomes a safe haven by default,” said Schenker, who was the fourth-best forecaster of the dollar-yen exchange rate last quarter, according to Bloomberg rankings.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE