Yen Bears See Vindication in New BOJ Under Abe Watch: CurrenciesAllison Bennett and Monami Yui
For long-suffering bears on the yen, redemption is looking more likely if options are any guide.
After appreciating more than 60 percent between July 2007 and June of this year, the yen has tumbled almost 10 percent against a basket of developed-market currencies, including a drop of 2.2 percent last week, data compiled by Bloomberg show. Option traders are paying record premiums to protect against further depreciation as Prime Minister Yoshihiko Noda calls for elections next month. The yen slid to the lowest in almost seven months today.
Polls signal the main opposition Liberal Democratic Party will win elections on Dec. 16, led by Shinzo Abe who last week called for the Bank of Japan to pursue unlimited bond purchases and zero-to-negative interest rates. BOJ Governor Masaaki Shirakawa is due to step down in April after a five-year term.
“This is a major shift and the key event is the replacement of Shirakawa,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “It really is a change that would move the BOJ away from being the least expansive in terms of balance sheet use to potentially being ahead of the other central banks.”
At the same time, trade surpluses that have served as a main pillar of support for the yen are starting to erode. Japan’s imports exceeded exports by 3.22 trillion yen ($40 billion) in the six months ended Sept. 30, the biggest trade deficit for a fiscal half-year period, according to Ministry of Finance data going back to 1979.
“Japan’s descent into a constant trade deficit takes some gloss of the yen as a haven and is a cause for weakness in the currency,” said Satoshi Yamada, the Tokyo-based manager of fixed-income trading at Okasan Asset Management Co., which oversees about $11 billion. “I can’t really see any way Japan can regain its status as an export powerhouse.”
The yen weakened against all but three of its 16 most-traded counterparts today. It was little changed at 81.19 against the dollar as of 2:28 p.m. in New York, after falling to as low as 81.59, the weakest since April 25. It depreciated 0.3 percent to 103.95 per euro, after dropping to 104.11, a level not seen since Oct. 25.
The surplus in the nation’s current account, the broadest measure of trade, had made Japan less reliant on foreign capital to fund its budget deficit and a debt load that has swelled to 237 percent of gross domestic product, which International Monetary Fund data show is the most of any developed nation. The ratio for the U.S. is 107 percent.
“People have lost a fortune” betting against the yen in recent years “because it just hasn’t gone down,” John Taylor, the founder of FX Concepts LLC, said Nov. 15 at the Bloomberg FX12 Summit in New York. The hedge fund, which managed about $3 billion at the end of September, has trades set up to profit from the yen’s decline, he said.
Three-month options show a record premium for dollar calls, which grant the right to buy the U.S. currency against the yen, over puts, which confer the right to sell. The 25-delta risk reversal rate, which measures the difference between implied volatility on similar puts and calls, reached 0.945 percent on Nov. 15 and was at 0.935 percent today.
That compares to an average of a 1.8 percent in favor of dollar puts since Bloomberg began collecting the data in 2003.
“The market is making a bet that this call for an election is a paradigm shift,” John Hardy, the head of foreign-exchange strategy at Saxo Capital Markets in London, said in a Nov. 16 interview. “It’s deserving of a paradigm shift because it’s not about interest rates anymore it’s about the relative determination to competitively devalue your currency.”
The two currencies have historically risen and fallen along with differences in short-term interest rates. The rolling correlation over 30 days between the nations’ two-year swap rate plunged to 0.1 from 0.4 on the day Abe, 58, said the BOJ should provide enough stimulus until the inflation rate reaches 3 percent. A value of 1 indicates the assets move in unison.
Saxo sees the yen falling to 90 per dollar in 2013, compared with the median estimate of 83 among more than 40 strategists and economists surveyed by Bloomberg.
The yen has advanced 36 percent versus the dollar in the past five years, the most of more than 150 currencies tracked by Bloomberg. The currency’s strength punishes exporters as it makes their goods more expensive overseas and diminishes the value of repatriated income.
Japanese exporters can remain profitable as long as the yen is 82 per dollar or weaker, an annual Cabinet Office survey showed in February. The BOJ’s latest Tankan report showed the country’s large manufacturers expect it will average 79.06 in the year through March 2013.
Panasonic Corp. said it plans to cut 8,000 jobs in the second half of this fiscal year after firing 8,871 workers in the six months ended Sept. 30. Sharp Corp., the worst performer in Japan’s benchmark Nikkei 225 Stock Average in the past year, said this month there was “material doubt” about its ability to survive as it forecast a record net loss of 450 billion yen in 12 months through March.
The yen has strengthened about 12 percent versus the greenback since Noda’s Democratic Party of Japan came to power in September 2009, displacing the LDP that had governed the nation for all but 10 months since 1955.
“The LDP has traditionally been closer to exporters relative to the DPJ,” said Masafumi Yamamoto, the Tokyo-based chief foreign-exchange strategist at Barclays Plc, said by phone on Nov. 16. “An LDP administration, if realized, will have more of a prerogative to prevent the yen’s appreciation.”
Barclays sees the yen trading at 83 to the dollar in three months and 86 in a year.
Support for Noda, 55, fell 6.1 percentage points to 17.3 percent, the lowest since he took office in September 2011, in a poll published by Jiji Press on Nov. 15. When asked who would be a better prime minister, 32.5 percent of respondents to the Jiji poll picked Abe, 17.2 percent picked Noda and 50.6 percent said they didn’t know, or couldn’t answer.
Since the yen reached a postwar record of 75.35 per dollar last year, the BOJ and government have enacted 44 trillion yen in asset purchases and intervention. Even so, Shirakawa, 63, remains a lightning rod for criticism by lawmakers and companies who say the BOJ isn’t doing enough to weaken the currency and fight deflation. Consumer prices have fallen an average of 0.5 percent per month in the past decade.
“The view is spreading that Japan’s deflation will ease, removing some upward pressure for the yen, ahead of the elections and replacement of Shirakawa,” Masataka Horii, who runs Asia’s biggest mutual fund at Kokusai Asset Management Co., said in an interview in Tokyo on Nov. 15.
Horii’s $18.1 billion Kokusai Global Sovereign Open Fund had 7.4 percent of its assets in yen-denominated debt, compared with 27 percent and 11 percent for dollar- and euro-based holdings, according the company’s website. The yen portion has been as low as 4 percent, Horii said.
“There is still room for us to cut yen holdings,” Horii said.
With Europe’s debt crisis flaring again as concerns rise that Greece may exit the euro and as the U.S. faces more than $600 billion in mandated spending cuts and tax increases starting Jan. 1, investors are likely to seek the relative safety of the yen, according to Mizuho Securities Co.
“I wouldn’t be a surprised if investors flip their short positioning in the yen any time,” said Kengo Suzuki, a currency strategist in Tokyo at the unit of Japan’s third-largest bank by market value. “Investors are growing cautious as they see the U.S. fiscal cliff and Greece as a couple of the biggest risks. Upward pressure for the yen is likely to increase.”
Even if the BOJ heeds Abe’s call for more monetary easing, it may be offset by competing pledges of unlimited stimulus from the Federal Reserve and other central banks, according to Valentin Marinov, head of European Group of 10 foreign-exchange strategy at Citigroup Inc.
“I’m still somewhat skeptical as to whether the yen actually could indeed weaken that much against the dollar in the near future,” Marinov said in a Nov. 15 interview with Mark Barton on Bloomberg Television’s “Countdown.”
Japan’s economic growth is forecast to slow to 1 percent next year from 2.1 percent in 2012, according to the median estimate of analysts surveyed by Bloomberg.
Hedge funds and other large speculators have been betting on a decline in the yen for the past four weeks. So-called net shorts have averaged 31,442 contracts over that period, compared with average net longs of more than 18,000 in the prior four months, figures from the Washington-based Commodity Futures Trading Commission show.
“With the economy heading back into recession, we have a recipe for more aggressive easing,” Robert Rennie, the chief currency strategist at Westpac Banking Corp. in Sydney, said in a phone interview on Nov. 15.
“The BOJ has consistently shown over the last three to six months that they are willing to respond to that pressure.”
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