Shirakawa Dismissed by Yen Traders on Missed Price Target
Bank of Japan Governor Masaaki Shirakawa, who set the nation’s first inflation goal six months ago to halt a decade-long struggle with deflation, has failed to produce the weaker currency craved by exporters.
The yen slid as much as 8.8 percent against the dollar in the weeks after the BOJ shocked markets in February by announcing a 1 percent inflation target and expanding its asset- buying fund. The relief for exporters was fleeting, as the central bank refrained from expanding stimulus since April and the currency resumed its climb toward a postwar record. Futures traders raised bullish bets to a five-month high as consumer prices continued their decline.
Blocking Shirakawa’s path to a weaker currency is the popularity of Japanese government bonds, which returned more than U.S., U.K and German debt after adjusting for inflation, attracting overseas demand for the securities and the yen needed to buy them. Battered by the stronger exchange rate, Sony Corp., Sharp Corp. and Panasonic Corp. have cut employees, earnings forecasts or both. Finance Minister Jun Azumi is calling for more measures from the central bank to stem gains.
“The BOJ did not deliver as much easing as was initially expected, and as a result, the yen also didn’t depreciate as much,” said Frederic Neumann, the co-head of Asian economic research in Hong Kong at HSBC Holdings Plc. “The BOJ is seen as being very timid.”
The central bank pioneered so-called quantitative easing a decade ago, buying bonds and other assets to support market prices and stimulating the economy through low interest rates. With benchmark borrowing costs near zero, the central bank’s primary policy tool in recent years has been its asset-purchase fund, which it has expanded to 45 trillion-yen ($566 billion). BOJ members left the fund unchanged at the Aug. 9 meeting, rejecting calls by lawmakers for more action.
Japan has been caught in a vicious circle since the mid 1990s, with slow growth causing persistent price declines which make even low-yielding government bonds attractive. The yen’s nominal effective exchange rate, or relative value measured to major peers, has risen about 30 percent during the period, while consumer prices fell at a monthly average of 0.1 percent.
“The risk of additional easing by the BOJ continues to simmer, though it’s unlikely to weaken the yen against the dollar,” said Masafumi Yamamoto, who worked at the central bank for a decade and is now chief currency strategist at Barclays Plc in Tokyo.
Since falling to an 11-month low of 84.18 per dollar March 15, the yen rallied to 77.91 this month, approaching the post- World War II record of 75.35 reached Oct. 31.
Analysts now expect the yen to end 2012 at 79 per dollar, compared with a forecast of 85 in April, according to the median of estimates compiled by Bloomberg. HSBC is among the most bullish, expecting it to strengthen to 74, the data show.
The yen declined 1.6 percent last week and today touched 79.66 per dollar, the weakest since July 12. It’s averaged 79.54 in 2012, stronger than last year’s record 79.71 level.
Further gains may fan speculation Japan will intervene in currency markets. Finance Minister Azumi said July 31 he stands ready to act “decisively” on excess foreign-exchange moves.
The nation sold 14.3 trillion yen in 2011, the third- largest annual sum, according to Ministry of Finance data going back to 1991. The daily record was 8.07 trillion yen on Oct. 31 last year, which sparked a drop of as much as 5.5 percent on that day.
“Once we start to see more substantial yen appreciation, the risk of intervention rises,” Todd Elmer, a currency strategist at Citigroup Inc. in Singapore, said in an interview on Aug. 14. “Looking at the experience of the past, the 75-76 region would be a level which looks more consistent with strain on the exporters that would force intervention.”
The yen may strengthen toward 76 per dollar, he said.
Hedge funds and other large speculators increased the number of contracts betting on an advance in the yen compared to those foreseeing a drop to 32,254 on July 31, the most since Feb. 7, according to figures from the Washington-based Commodity Futures Trading Commission. So-called net longs were at 30,704 on Aug. 14 after being net short, or expecting a decline, as recently as May.
The BOJ’s desire for a weaker yen is being thwarted in part by a global thirst for safety. As Europe’s debt crisis enters its third year and monetary easing by central banks drives bond yields to record lows, international investors have piled into Japan’s government securities as a haven.
Foreigners bought a net 5.55 trillion yen of Japanese debt this year through Aug. 11, figures from the Ministry of Finance show, after acquiring 20.9 trillion of the securities last year, the most ever, up from 6.68 trillion yen in 2010.
Ten-year Japanese government debt yields 1.04 percentage points more than the inflation rate, the highest real interest level after Italy among the Group of Seven industrialized nations, Bloomberg data show. Treasury yields are 0.4 percentage point more than U.S. inflation.
Inflows continue even with Japan’s ratio of debt to gross domestic product at 235 percent, the highest globally and compared with 163 percent for Greece and 107 percent for the U.S., estimates from the International Monetary Fund show. Fitch Ratings downgraded Japan’s local-currency issuer rating in May by one level to A+ with a negative outlook.
“Japan’s bonds have an advantage from the perspective of real yields,” said Kiyoshi Ishigane, a Tokyo-based senior strategist at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of $76 billion. “Investors who are concerned about a global slowdown are buying government bonds in the countries that have a high credit rating or have some resilience despite their lower credit profiles, such as Japan.”
The yield on the benchmark 10-year Japanese government bond climbed 1.5 basis points to 0.85 percent today, after falling to a nine-year low of 0.72 percent on July 23.
The yen tends to strengthen during periods of financial turmoil because Japan’s current-account surplus makes it less reliant on foreign capital to fund its budget deficit.
Policy makers’ efforts to boost inflation and weaken the yen haven’t succeeded. Even as the government intervened in currency markets and the BOJ flooded the financial system with cash, consumer prices excluding fresh food fell 0.2 percent in June from a year earlier, the statistics bureau said in Tokyo last month, defying the BOJ’s goal of 1 percent inflation.
Japan’s CPI is expected to grow 0.1 percent this year and next, after falling 0.28 percent last year, according to government data and forecasts compiled by Bloomberg.
The BOJ’s monetary easing hasn’t prompted companies to increase borrowing and expand business. Bank loans fell 26 percent from a record in 1996. Wages have declined 7 percent from a peak in 1998, prompting consumers to cut spending and deepening deflation.
“The market sort of realized that the BOJ hasn’t put its heart behind its words,” Takatoshi Ito, a former Ministry of Finance official and now an economics professor at the University of Tokyo, said in a telephone interview on Aug. 15. Following the surprise stimulus in February, “the market was disappointed that the BOJ didn’t follow up on the announcement with purchases of other things,” he said.
This failure is slowing economic growth. A stronger currency reduces repatriated profits at domestic exporters and makes their goods pricier than those of overseas competitors.
Japanese exporters can remain profitable as long as the yen is at 82 per dollar or weaker, according to an annual government poll released in February. The currency has been stronger than that level since April, while the Topix index of more than 1,600 Japanese shares has slumped more than 10 percent since early that month.
Sony, the nation’s biggest-consumer electronics exporter, cut its full-year profit forecast by 33 percent earlier this month, citing slowing demand and the strong yen. The company lost money the four previous years. Panasonic may cut the number of staff at its headquarters to “a few hundred” from about 7,000, President Kazuhiro Tsuga told reporters in July.
The number of corporate bankruptcies caused by the yen’s strength more than doubled to 68 during the January-July period from a year earlier, a survey by Teikoku Databank Ltd. showed on Aug. 13. The failures soared six-fold to 85 cases last year from 2008, the Tokyo-based database provider for corporate credit said.
“The electronics sector has been completely lacerated by yen appreciation,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo., a unit of Nippon Life Insurance Co., Japan’s biggest life insurer. “The strong yen is one of the sources of pain for Japanese companies.”
Falling profits at exporters hurts the broader economy. Japan’s gross domestic product increased an annualized 1.4 percent in the three months through June, according to government data on Aug. 13, short of the 2.3 percent median estimate in a Bloomberg News survey of economists.
Japan’s economic expansion is projected to slow to 1.3 percent next year, compared with the average of 1.5 percent for the Group of 10 countries, according to economist estimates compiled by Bloomberg. The U.S. may grow 2.1 percent in 2013 while China expands 8.4 percent.
Shirakawa remains sanguine, saying on Aug. 9 that Japan’s inflation rate may reach his 1 percent target in the 12 months through March 2015. The time horizon for traders tends to be shorter than that of monetary policy, he told reporters.
“The Bank of Japan has tended to disappoint,” Citigroup’s Elmer said. “I’m not sure there’s going to be any change to that pattern where they do the bare minimum to satisfy the government as well as the market.”
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