Yen in ‘Tug of War’ Over Fed Tapering Bets, Ex-MOF Kato Says

The yen is in a “tug of war” as a result of speculation the Federal Reserve will begin tapering stimulus this year, according to Takatoshi Kato, a former top currency official at Japan’s Ministry of Finance.

“One of the main objectives of the Fed’s quantitative easing was to boost asset prices and encourage spending by providing ample liquidity, but we’re beginning to see some of the side effects,” Kato, 72, who is now the president of Japan’s Center for International Finance, said in an interview yesterday in Tokyo.

Investors are pulling money from emerging markets as they seek to avoid risk, and they’re turning to the yen as a safe haven, he said. At the same time, the possibility of a reduction in the pace of the Fed’s bond buying is pushing up Treasury yields, and raising the appeal of the dollar.

Based on fundamentals, an exchange rate of 100 yen to the dollar is “just about right,” Kato said.

The yen traded at 97.54 per dollar as of 6:51 a.m. in London. It reached a 4 1/2-year low of 103.74 on May 22, after tumbling 20 percent in the previous six months, the most among the 31 major currencies tracked by Bloomberg, as Japanese policy makers pursued unprecedented stimulus to end 15 years of deflation. The yen tends to strengthen during periods of financial and economic turmoil because Japan isn’t reliant on foreign capital to fund its deficits.

Fed Tapering

Fed Chairman Ben S. Bernanke said June 19 that the central bank may begin tapering its bond purchases this year and end it in mid-2014. The Fed has been buying $40 billion of mortgage-backed securities and $45 billion of U.S. government debt each month to put downward pressure on borrowing costs.

The announcement helped push the yield on 10-year U.S. Treasuries to 2.66 percent on June 24, the highest since August 2011. The same day, the MSCI Emerging Markets Index of stocks tumbled to the lowest in more than a year.

Japan’s benchmark 10-year yield touched 1 percent on May 23, the most in more than a year, after tumbling to a record 0.315 percent on April 5, the day after the Bank of Japan said it would double monthly debt purchases to achieve 2 percent inflation. The yield was little changed at 0.87 percent today.

Price volatility for Japanese government bonds jumped 61 basis points on April 4, the most since June 2003, before stabilizing at just below 4 percent this week.

Seeking Stability

Relative to the increase in borrowing costs in the U.S. and other nations, JGB yields have risen “just a touch,” Kato said. “A lot of effort is still needed from here to maintain stability in the JGB market.”

Japan’s consumer prices excluding fresh food were probably unchanged in May from a year earlier, according to a Bloomberg News survey of economists taken before the data on June 28. The breakeven rate, a measure of inflation expectations, indicates annual price increases of 1.16 percent in the next five years, down from as high as 1.84 percent on May 15.

The central bank’s 2 percent inflation target “is a desirable goal, but it’s unclear how long it will take,” Kato said. “It could be said that if the inflation rate is stably positive, a big part of the goal has been accomplished.”