Citigroup Extends Yen-Decline Forecast on Abe Stimulus

The yen will weaken more than previously forecast versus the dollar this quarter as Japanese Prime Minister Shinzo Abe pushes for drastic monetary stimulus, according to Citigroup Inc.

Japan’s currency may fall to 90 yen per dollar at the end of March, compared with a previous forecast of 85 to 87, said Citigroup analysts led by Osamu Takashima in Tokyo. The yen decline may extend to 95, the lowest level since August 2009, after already surpassing the 87 level Citigroup had previously targeted for spring, Takashima said in the report.

“Investors now think that the current low interest rates are going to be in place for a long time,” Steven Englander, head of Group of 10 currency strategy at Citigroup in New York, said in a telephone interview. “The rate differentials are becoming more of a signal as to where the attractive investments are, and Japanese investors are beginning to respond to that by selling the yen.”

The yen, which is highly correlated with the difference between yields on U.S. and Japanese sovereign debt, previously strengthened to a level not supported by the interest-rate differential, Takashima wrote today in a note to clients. Treasury two-year notes yield 0.24 percent, while Japan’s two-year yields 0.10 percent, according to data compiled by Bloomberg.

Yen Quote

The yen fell 0.3 percent to 88.15 per dollar at 2:06 p.m. in New York after earlier declining as much as 0.5 percent. The currency slipped to its lowest level since July 2010 versus the greenback on Jan. 4.

Morgan Stanley also lowered its first-quarter yen outlook to 95 per dollar from 84. The firm projected the Japanese currency will fall to 105 by the end of 2014, weaker than its previous forecast of 90.

Federal Reserve minutes released Jan. 3 signaled the central bank will probably end its $85 billion monthly bond purchases sometime in 2013, even after previously saying it would hold down interest rates until mid-2015. This may influence investors looking at interest-rate differentials, Takashima said.

“You’re beginning to see signs that the rest of the world is stabilizing a little bit in a way that would’ve been unthinkable three months ago,” Citigroup’s Englander said. “Investors have adjusted their expectations.”