Shirakawa Bows to Yen Bulls as Intervention Fails
Bank of Japan Governor Masaaki Shirakawa is being steamrolled by investors pushing the yen toward a post-World War II high against the dollar, negating his attempts to weaken the currency.
After depreciating 10.4 percent in the first quarter, the most since 1995, the yen is up 12.5 percent since March, the best among 10 developed-nation currencies, according to data compiled by Bloomberg. The rebound from an almost 10-month low reached March 21 is set to continue as the fallout from Europe’s debt crisis rattles markets from the U.S. to China, say an increasing number of investors and strategists from Tokyo to London and New York.
“All investors know that intervention will not stop the yen strength,” Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo, which manages $7.3 billion of assets, said in a telephone interview on May 30. “Intervening at this stage would be unwise and a waste of money. As long as Europe remains in a state of confusion, yen will continue to be bought for its relative safety.”
Japan sold 14.3 trillion yen ($183 billion) last year, the third-most on record, Ministry of Finance data show, to slow the currency’s gains after the country was struck by an earthquake and the worst nuclear crisis in a generation. While officials said last week they are ready to take further action to prevent the yen’s strength from damaging Japan’s nascent economic recovery, currency traders pushed it to its biggest weekly gain of 2012. Hedge funds have cut bets it will weaken versus the dollar by 83 percent from an almost five-year high in March.
The yen may rise to as much as 75 per dollar, Sakurai said. It slipped 0.44 percent to 78.35 per dollar at 3:03 p.m. in New York, after climbing 2.1 percent last week. Against the euro, it strengthened 2.8 percent to 97.01 in the five days ended June 1 and was at 97.89 today.
We’ve been monitoring “the recent appreciation of the yen,” Shirakawa, 62, said at a forum in Tokyo today. “The bank carefully monitors the development of the foreign-exchange rate from the viewpoint of how it affects the economy through its impact on business sentiment.”
Japan’s currency is stronger now than the 80 per dollar level reached in 1995, when global coordinated intervention sent it tumbling to 147.66 over the next three years.
Even with the gains, the yen isn’t overvalued compared with 1995, according to strategists at New York-based Morgan Stanley. They said in a report dated May 31 that on a trade-weighted basis, the yen is “roughly” in line with its average over the past two decades and would need to appreciate to about 55 per dollar to equal its strength in the mid-1990s.
“The discrepancy between nominal and real valuation reflects improved Japanese competitiveness as a consequence of deflationary declines in domestic prices and wages,” Ronald Leven, an executive director and strategist at Morgan Stanley in New York, said in the report.
The yen tends to strengthen during economic and financial turmoil because while it has the world’s most debt, which is twice gross domestic product, the current-account surplus makes the country less reliant on foreign capital. The yen has risen even as Japan’s credit rating was cut on May 22 by Fitch Ratings, which cited the nation’s “leisurely” efforts to tackle its burden.
Yields on 10-year Japanese government bonds touched 0.79 percent today in Tokyo, the lowest since 2003, and stocks tumbled after Spain struggled to recapitalize its banks last week, while last month’s inconclusive Greek elections fueled bets the nation may quit the currency. Japan’s Topix Index (TPX) plunged to the lowest level since 1983 and entered a bear market. The gauge declined 1.8 percent in the five days to June 1, falling for a ninth week, the longest losing streak since September 1975.
The turmoil in Europe is taking its toll on the global economy, diminishing the odds that world leaders will move to help Japan weaken its currency at the expense of theirs through coordinated intervention in the foreign-exchange market.
The U.S. Labor Department reported job gains of 69,000 in May, the fewest in a year, and said the unemployment rate rose to 8.2 percent from 8.1 percent in April. Commerce Department figures a day earlier showed the economy expanded at a 1.9 percent annual rate last quarter, less than a 2.2 percent previous estimate.
Manufacturing (CPMINDX) in China grew last month at the slowest pace this year, trailing 26 of 27 estimates in a Bloomberg survey, according to an index published by the nation’s statistics bureau and logistics federation.
“With the ongoing concerns about Europe, Greek elections and Spanish banking sector, we’re seeing the yen benefit from the safe-haven flows,” Sue Trinh, a Hong-Kong based senior foreign-exchange strategist at Royal Bank of Canada, said in a telephone interview May 30. “The goal of Japanese officials is to manage the pace of appreciation in the yen and not try to engineer its outright weakness.”
RBC, the most accurate yen-dollar forecaster in a first-quarter survey by Bloomberg News, predicts the Japanese currency will appreciate to 73 per dollar and 93 per euro by year-end.
The yen will average 80 per dollar this quarter and 82 in the final three months of the year, according to the median estimate of more than 50 economists surveyed by Bloomberg. That’s stronger than predictions made at the end of March that it would weaken to 83 per dollar in the second quarter and about 85 in the fourth quarter.
The difference in the number of wagers by hedge funds and other large speculators on a drop in the yen against the dollar versus those on an advance -- so-called net shorts -- fell to 11,330 in the week ended May 29, from 67,622 on March 27, according to the Commodity Futures Trading Commission.
Japan refrained from selling yen in the month to May 29, the Ministry of Finance said on its website on May 31. It last sold the currency on Nov. 4 as Europe’s deepening crisis and slower global growth spurred the currency to a post-World War II high of 75.35 per dollar on Oct. 31.
While the yen immediately weakened to 79.53 that day, it began to slowly appreciate until reaching 76.03 on Feb. 1.
“We will continue to carefully monitor currency market moves with more caution,” Japanese Finance Minister Jun Azumi, 50, told reporters in Tokyo on June 1. “If these excessive moves continue, I think I must take decisive action.”
Japan probably didn’t conduct intervention last week to weaken the yen after the currency’s largest gain since July, said Totan Research Co., citing its analysis of the Bank of Japan’s current-account balances. The yen climbed to a more than three-month high versus the dollar on June 1 after the U.S. jobs data. It then retreated, spurring speculation that Japanese authorities may have sold the currency to rein in its advance.
Shirakawa said last week events in Europe may dictate what happens in the foreign-exchange market.
“A large factor determining the foreign-exchange market is a valuation about how much risk global investors can take,” Shirakawa said in the Diet on May 31. “Whether the situation over the European debt problem is improving or worsening seems to be the big determinant factor.”
The central bank’s press office declined to comment on the yen in a phone call made by Bloomberg.
A stronger yen raises prices for exporters and reduced the value of their repatriated income. Every one-yen movement against the dollar leads to a 2.4 percent drop in operating profit at Nissan Motor Co. (7201) and 3.3 percent at Toyota Motor Corp., according to a Goldman Sachs Group Inc. report in April.
Japan’s large manufacturers expected the currency to trade at an average rate of 78.14 in fiscal 2012, according to the BOJ’s Tankan quarterly survey released on April 2. That compares with an estimate of 79.02 for the fiscal year ending March 31, indicated in the survey released on Dec. 15.
Toyota, which makes 3 million vehicles in Japan, has announced plans to increase production in Indonesia, Russia and the U.S., while Nissan Chief Executive Officer Carlos Ghosn said on May 11 that the appreciating yen poses the biggest risk for his company’s performance this fiscal year.
Japanese exporters losing customers to overseas rivals are cutting labor costs. Panasonic Corp. (6752), the biggest employer among companies on the Tokyo Stock Exchange, said May 29 it may cut headquarters jobs after streamlining production units. Sony Corp. announced plans on April 12 to reduce its workforce by 10,000 after four straight years of losses. The company forecast profit on May 10 that was less than half of what analysts estimated.
Policy makers may be waiting until the current bout of risk aversion abates, according to Adrian Lee & Partners, which manages more than $5 billion from London and Dublin, according to its website.
“The BOJ realizes that the key factors driving the yen higher are beyond their control,” Adrian Lee, president and chief investment officer, said by telephone on May 31. “They are doing the best they can to slow its appreciation and may intervene when the market is on their side. There was a boost to growth from the temporary stimulus. That is now fading.”
A resurgent economy is also fueling the yen. Japan’s gross domestic product probably grew at a 4.5 percent annual pace in the first quarter, according to the median forecast of 10 economists surveyed by Bloomberg News. GDP grew at a 0.1 percent annual rate in the final quarter last year.
The probability of Japan intervening at the yen’s current level and pace of change is low, said Tomoya Masanao, head of money management for Japan at Pacific Investment Management Co., which runs the world’s biggest bond fund.
Yen selling last year wasn’t able to stop the currency’s appreciation, so “it’s hard to see intervention this time around would be able to change the market trend,” Masanao said in an interview on June 1 at a Euromoney conference in Tokyo.