Commonwealth Bank Sees 119 Yen as Current-Account Deficit Bites

Commonwealth Bank of Australia cut its yen forecast to 119 per dollar for the end of the year from 107 previously, citing Japan’s deteriorating balance of payments.

Exports in the world’s third-largest economy exceeded imports by a record 11.5 trillion yen ($112 billion) in 2013, finance ministry data showed this week. A government report earlier this month also showed the biggest monthly current-account shortfall. Japan hasn’t posted a deficit on an annual basis in the broadest measure of trade since at least 1985, making it less reliant on foreign capital and yen a preferred haven during times of financial turmoil.

“That collapse in Japan’s current-account surplus is really squashing the major pillar of yen strength and generating yen weakness,” Richard Grace, the Sydney-based head of exchange and rates strategy at CBA, said in a Bloomberg Television interview today. “We’re in the very, very early stages of the yen losing its safe-haven status as that current-account surplus eventually disappears.”

The International Monetary Fund forecasts Japan will report a surplus for 2013 equivalent to 1.33 percent of gross domestic product and 1.74 percent this year.

The yen gained 0.3 percent to 102.46 per dollar as of 3:19 p.m. in Tokyo from yesterday. It has strengthened 2.8 percent this month, the best start to the year since 2010, as an emerging-market rout sparked risk aversion. Japan’s currency weakened 18 percent last year, the most since 1979, and is expected to fall to 110 by the end of December, according to the median estimate of economists surveyed by Bloomberg News.

Emerging Markets

“The strengthening in the yen during emerging-market disturbance was not that strong and we think that reflects the narrowing current-account surplus in Japan,” said CBA’s Grace. “All you can really anticipate from Japan is capital repatriation from the very large net foreign asset positions they hold offshore because the inflows coming from the trade numbers have reversed.”

Commonwealth Bank, Australia’s largest lender, also revised down its year-end forecasts for the Australian dollar to 84 U.S. cents from 89 previously.

Slowing “emerging market growth means less commodity-intensive demand, which affects the commodity currencies like the Australian dollar,” Grace said. “We’re seeing the U.S. economic momentum pick up, we see further U.S. dollar strength.”

Australia’s dollar dropped 0.3 percent to 87.67 U.S. cents, poised for a 1.7 percent monthly drop.

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