Yen Seen Rallying 15% Threatens Abe’s Successes: Market Reversal

Mitsubishi UFJ Morgan Stanley Securities Co. and Westpac Banking Corp. are breaking from the pack to bet the yen will rally in 2014, which could threaten Japan’s efforts to reflate the economy.

The yen will surge 15 percent from its low for this year to about 90 per dollar, which would be the strongest level since last January, according to Naohiko Miyata at Mitsubishi UFJ, citing trading patterns. The yen slid 18 percent versus the dollar last year, the most since 1979, after Prime Minister Shinzo Abe began his economic strategy of fiscal spending, monetary easing and growth initiatives.

“We’ve probably reached a bottom in the yen, and if that proves to be true, we’ll see a large rebound,” Miyata, the firm’s Tokyo-based chief technical analyst, said by phone on Jan. 6. “Since the start of the Abe trade, we haven’t seen any corrections exceeding 10 yen. 2014 will probably be the year where we’ll see such a move.”

Last year’s drop in the yen helped push Japanese stocks to the highest levels since 2007 and stoke inflation past the halfway point of the central bank’s target. Miyata’s forecast contrasts with calls in a Bloomberg survey of strategists and economists for the yen to remain little changed at 105 per dollar through March before sliding to 110 by December.

‘Strong Signal’

Miyata, who correctly predicted the end of the yen’s 40-year bull cycle in 2011, cited a technical indicator known as the Elliott Wave for his latest call on Japan’s currency. The yen will surge after it completes what’s known as a five-wave bearish cycle, which has lasted about two years, Miyata said.

The yen fell to a five-year low of 105.44 per dollar on Jan. 2, and was at 104.01 as of 2:21 p.m. in New York. It dropped 17 percent last year against nine major peers, including the euro and British pound, according to Bloomberg Correlation-Weighted Currency Indexes.

The yen’s key test will be whether it advances past its 20-day moving average for the first time since November and breaches the Dec. 17 high of 102.50, according to Miyata. Such a move would be a “strong signal” the yen is starting a bullish cycle that will drive it to 100 in the next three months, he said. The 20-day moving average was 104.41 yesterday.

After a brief second-wave correction, the yen will gain past 90 in the third stage of the Elliott Wave, possibly around October, Miyata said. Japan’s currency may gain toward 86.84, a level known as the 61.8 percent Fibonacci retracement of its drop from a post-war high of 75.35 per dollar in October 2011 to its five-year low of 105.44 on Jan. 2, he said. Fibonacci analysis is based on the theory that prices move by certain percentages after reaching a high or low.

Five Waves

Elliott Wave theory seeks to predict market moves by dividing trends into five chunks. The first began on Feb. 1, 2012, as the yen depreciated from 76.03 per dollar to an 11-month low of 84.18 on March 15; the second lasted until Sept. 13, when it rose to 77.13; the third ended May 22 when the yen hit a 4 1/2-year low of 103.74; and the fifth began on Oct. 8, when it touched a two-month high of 96.57, according to Miyata.

Miyata correctly predicted in May the end of the third wave, forecasting that the fifth would end at about 105.50 by about the first quarter of this year.

Mizuho Securities Co. is among firms still expecting the yen to keep falling this year as the Bank of Japan increases stimulus and the nation raises its consumption tax in April.

Growth Disparity

“Companies expect U.S. growth to accelerate this year while Japan’s economy slows on Abe’s plan to raise the sales tax,” Kengo Suzuki, the chief currency strategist at a unit of Mizuho, Japan’s third-biggest financial group by market value, said by phone on Jan. 7. He predicts the yen will weaken to 110 by year-end.

U.S. gross domestic product will grow 2.6 percent this year, outstripping Japan’s 1.6 percent expansion, according to economists surveyed by Bloomberg.

Even with growth lagging the U.S., Japan’s government has had some success in ending the 15 years of deflation that have crippled the economy and in boosting demand for its assets. Significant gains in the yen would risk undoing that hard work.

Japanese prices excluding fresh food rose 1.2 percent in November from a year earlier, pushing the nation past the halfway point of achieving 2 percent inflation. The Nikkei 225 Stock Average, the nation’s main equities market, closed above 16,000 for the first time in six years on Dec. 25.

‘What Tricks?’

Westpac expects the yen to appreciate to 99 per dollar by the end of 2014 as the Bank of Japan runs out of tools to expand monetary easing. That makes it the most bullish forecaster in Bloomberg’s currency survey after Prestige Economics LLC, which predicts a level of 96.

The BOJ announced on April 4 it would double its monthly bond purchases to more than 7 trillion yen ($67 billion). Thirty-seven percent of economists surveyed by Bloomberg predicted an expansion of this monetary stimulus in the second quarter, down from 51 percent in a November poll.

“The near-term outlook for dollar-yen is probably skewed to the downside,” Jonathan Cavenagh, a strategist at Westpac in Singapore, said in a Jan. 7 interview. “The BOJ had a great run last year, but the market is questioning, what tricks do they have in their bag now? Any major announcements will probably have less of an impact this time around compared to last year.”

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