Yen Volatility Slide Gives Kuroda Shock Opportunity
The growing complacency among foreign-exchange traders is handing Bank of Japan Governor Haruhiko Kuroda an opportunity to get the maximum effect should he choose to ease monetary policy further.
Anticipated price swings in the yen for the next six months fell yesterday to the lowest level since December 2012, adding to the biggest drop in volatility among major currencies since Kuroda pledged a year ago to double the nation’s monetary base. Low volatility suggests traders have lowered their guard against the potential for market-moving announcements by the BOJ.
“The BOJ can engineer another surprise by moving quickly, maximizing the effectiveness of additional easing,” Yuji Saito, a director of foreign exchange at Credit Agricole SA in Tokyo, said by phone on April 4. “The BOJ needs to be forward-looking with policy.”
As the economy slows and the yen rebounds from a five-year low, pressure is building on Kuroda to add to the unprecedented 7 trillion yen ($68 billion) of monthly government bond purchases he unveiled at his first meeting as BOJ chief in April 2013. The central bank will expand stimulus by July, according to 72 percent of economists surveyed by Bloomberg News. It kept policy unchanged at the end of a two-day meeting today.
The yen may fall to 110 per dollar in the event of another policy surprise, Credit Agricole’s Saito said. He predicted the BOJ might act as soon as its April 30 meeting to provide further stimulus. Japan’s currency traded at 102.79 as of 11:50 a.m. in Tokyo.
Kuroda’s first easing program pushed the yen 3.4 percent lower on the day he announced it, and the currency fell an additional 8.6 percent by Jan. 2, when it reached a five-year low of 105.44. After leading declines among its Group of 10 peers in 2012 and 2013, the yen posted its biggest first-quarter gain in six years from January through March. Kuroda said last month he won’t hesitate to adjust policy as needed.
“I was deeply surprised and deeply impressed by what we saw in April of last year, so I remain open to being similarly excited and impressed by what we see in coming months,” Robert Rennie, head of currency and commodity strategy at Westpac Banking Corp. in Sydney, said yesterday by phone. “The market complacency -- or lack of focus on yen -- is the opportunity.”
Rennie predicted the yen may test its five-year low if Kuroda can surprise again, and said the BOJ may consider buying public agency bonds or making its debt purchases open-ended.
Four of 36 economists in a Bloomberg survey conducted from March 28 to April 3 forecast the BOJ would expand monetary stimulus on April 30, among a total of 27 who expected action by the end of the third quarter. Five saw more easing at one of two meetings in October, and the remaining four saw no additional stimulus. None of the economists expected a policy change today.
“It’s hard for the BOJ to achieve the same impact with stimulus again so a surprise has to come from the timing,” Yuichi Kodama, the chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said by phone April 3. “Given it takes months for the effects of monetary policy to penetrate the economy, I predict easing later this month.”
Kuroda’s earlier efforts are being derailed by a combination of global and domestic events.
An investor exodus from emerging markets earlier this year stoked demand for Japan’s currency as a haven, sending it to a more than two-month high of 100.76 per dollar on Feb. 4. The economy is under threat from an increase in the nation’s sales tax this month, with gross domestic product forecast to shrink 3.5 percent in the second quarter, the worst contraction in three years, according to analysts surveyed by Bloomberg.
Consumer price gains have stalled since December, when they rose 1.3 percent from a year earlier, the fastest pace since October 2008. Inflation will be 1.5 percent in a year’s time, according to a BOJ survey of companies that concluded in March.
“Kuroda is already halfway through his two-year time frame for achieving inflation, so I think he might become increasingly desperate as the year progresses,” Greg Gibbs, the Singapore-based head of Asia Pacific markets strategy at Royal Bank of Scotland Group Plc, said by e-mail on April 6. “I can certainly understand why people don’t expect the same kind of fireworks as last time. But people have mistaken the calmness at the BOJ to mean inaction. The BOJ is still churning under the surface.”
BOJ policy makers will probably double purchases of exchange-traded funds in a second round of monetary easing overseen by Kuroda, the Bloomberg survey of economists shows. They will increase annual ETF buys to 2 trillion yen in the months ahead, according to the poll. The bank could boost annual bond purchases by at least 10 trillion yen.
Expectations among traders for volatility have fallen globally as major central banks keep borrowing costs at record lows. Deutsche Bank AG’s Currency Volatility Index, which measures the three-month implied volatilities of nine major currency pairs, closed yesterday at 6.65, the lowest level since 2007 and down from 11.21 on June 24.
Six-month implied dollar-yen volatility fell to 8.69 percent yesterday on a closing basis, compared with an average of 11.18 over the past year, data compiled by Bloomberg show.
The yen will weaken to 108.5 per dollar by year-end as a looser Japanese monetary policy contrasts with a removal of stimulus by the U.S. Federal Reserve, according to Daisaku Ueno, the Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. That compares with a median estimate of 110 in a Bloomberg survey of more than 50 analysts.
“Last April, both the magnitude and the timing of Kuroda’s stimulus bombshell contributed to the massive surprise,” Ueno, whose firm is a unit of Japan’s biggest financial group by market value, said by phone on April 2. “This time, an expansion of stimulus is widely expected, and there’s a limit to how much can be added. Another surprise is difficult.”
To contact the editors responsible for this story: Garfield Reynolds at email@example.com Jonathan Annells