Yen to Drop 18% as BOJ Spurs ‘Normalization’: Chart of the Day

The yen may slide another 18 percent as the Bank of Japan’s efforts to expand the money supply spur domestic investors to shift assets overseas, according to Credit Suisse Group AG.

The yen’s 20 percent drop since the middle of November completed the first stage of its “normalization,” which will continue until the currency reaches 120 per dollar in 12 months, according to Ray Farris, global head of currency strategy at Credit Suisse. The CHART OF THE DAY shows the yen remains stronger than its average of 116.6 per dollar from 1990 to 2008, before the global financial crisis and Japan’s record 2011 earthquake triggered the currency’s surge to post-war highs.

“The yen can weaken a lot more in terms of its historical valuations,” Farris said in an e-mailed response to questions. The combination of continued monetary easing by Japan’s central bank while the Federal Reserve gets closer to tapering stimulus “should amplify the effect of the BOJ’s policy on the yen.”

Japan’s central bank today retained its plan to increase the monetary base by 60 trillion yen ($609 billion) to 70 trillion yen per year, and said the economy was starting to recover “moderately.” The BOJ may eventually boost stimulus measures to achieve the inflation goal of 2 percent, and its buying of local assets will compel Japanese investors to seek alternatives in a “slow, gradual process,” Farris wrote.

Ministry of Finance data today showed Japanese bought 973.1 billion yen in overseas bonds in the week through July 5, snapping seven weeks of net sales that made for record divestitures in the first half. That trend defied the “portfolio shift” into foreign securities that BOJ Governor Haruhiko Kuroda predicted would occur amid central bank easing.

Credit Suisse’s forecast of 120 per dollar is the third-most bearish view among estimates for the yen compiled by Bloomberg for the second quarter of 2014, with the median call at 109. Japan’s currency is expected to finish 2013 at 105, according to projections compiled by Bloomberg, compared with 98.51 as of 2:30 p.m. in Tokyo.

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