Yen Weakness in Foreigners’ Hands Leaves Abe Exposed: Currencies

Japanese Prime Minister Shinzo Abe is entirely dependent on foreigners to deliver the weaker yen that’s the linchpin of his economic policies.

While the currency declined 19 percent in overseas trading since Abe came to power on Dec. 26, 2012 through yesterday, it gained 3.4 percent in Tokyo hours, data compiled by Bloomberg show. Foreigners reversed course and bought the yen as a haven this year, driving it up by 3 percent versus the dollar as a reduction in the U.S. Federal Reserve’s stimulus program and slowing Chinese growth prompted an exodus from emerging markets.

Depending on overseas investors leaves the world’s third-largest economy vulnerable to changes in global sentiment. Abe was elected on a pledge to flood financial markets with cheap money to make exports more competitive and end 15 years of crippling deflation. His Abenomics policy has been successful in pushing up consumer prices and boosting stocks, though a slowdown in economic growth in the fourth quarter underscores the fragility of Japan’s recovery.

“Those who have ridden on Abenomics are foreigners,” Daisuke Karakama, a markets economist in Tokyo at Mizuho Bank Ltd., a unit of Japan’s third-biggest listed financial group by market value, said in an interview. “Unless Abe can keep their support, yen weakness and stock gains are unlikely to continue.”

Monetary Easing

The 60 trillion yen ($587 billion) to 70 trillion yen that the Bank of Japan pledged to pump into the financial system each year has succeeded in depreciating Japan’s currency by 5.7 percent against a basket of nine developed-market peers since April 4, according to Bloomberg Correlation-Weighted Indexes. Since Abe came to power, it has fallen 15 percent. The BOJ maintained the stimulus program yesterday, while increasing low-interest lending to Japan’s banks.

The yen fell to 105.44 per dollar on Jan. 2, its weakest level since October 2008, before rebounding to 102.24 as of 12:39 p.m. in New York. It ended last year at the lowest level against the basket of its most-traded peers since September 2008.

The yen’s reaction to a Feb. 17 report on gross domestic product highlights the gap between domestic and overseas trading. It gained as much as 0.4 percent in Tokyo hours after the Cabinet Office said the economy grew 0.3 percent in the fourth quarter, less than half the pace forecast by economists surveyed by Bloomberg. The currency went on to slip 0.1 percent in London trading. U.S. markets were closed for a holiday.

‘Speculative’ Weakness

The yen has more than doubled since the start of 1999 in Tokyo trading while weakening 50 percent overseas, according to BOJ daily rates from 9 a.m. to 5 p.m. Tokyo time.

“It underpins how speculative in nature the yen’s weakness actually became,” Paul Mackel, the Hong Kong-based head of Asian currency research at HSBC Holdings Plc, said in a phone interview yesterday. “A significant amount of the Abenomics story is priced in already. It’s going to be very, very difficult for the yen to keep falling at a pace like we saw last year.”

While foreigners have chiefly contributed to yen weakening for at least the past 15 years, rarely has the exchange rate formed such a fundamental part of Japan’s economic policy.

Hot Money

The weaker currency helped push core consumer prices up by 1.3 percent in December from a year earlier, the most since 2008 and compared with a target of 2 percent within two years. It also helped the economy to grow 1.6 percent in 2013, the fastest pace in three years, by improving revenue at exporters including Toyota Motor Corp. and Canon Inc., and powered a 51 percent surge in the Topix index of shares.

Foreigners acquired a record net 15.1 trillion yen of Japanese equities last year, according to the Tokyo Stock Exchange, while Japanese individual investors sold an unprecedented 8.8 trillion yen.

Overseas cash can move quickly, and as foreign investors started buying Japan’s currency amid last month’s emerging-market slump, they also dumped 1.17 trillion yen of shares, the most since March 2008, showing the vulnerability of Abenomics.

The yen tends to move in the opposite direction to Japanese stocks as foreign-equity buyers hedge against currency risk, according to Minori Uchida, the head of global-market research at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group by market value.

Bears Capitulate

Hedge funds and other large speculators -- mostly foreigners -- cut their bearish wagers on the Japanese currency by almost half to 78,786 contracts on Feb. 11, figures from the Washington-based Commodity Futures Trading Commission show. That’s down from 143,822 on Dec. 24, which was the highest number of so-called net shorts since July 2007.

Currency strategists have maintained a prediction since Jan. 9 that the yen will weaken to 110 per dollar by year-end, according to the median of more than 50 estimates compiled by Bloomberg. The yen rose 53 percent in the 15 years before Abe began his current stint as premier, climbing to a record 75.35 per dollar in 2011 and helping cause years of stagnant growth.

With Abe the sixth prime minister since his first term ended in 2007, “we don’t believe in the Japanese government,” said Akira Takei, the Tokyo-based chief fund manager for global bonds at Mizuho Asset Management Co., which oversees $39 billion. “None of them achieved their goals.”

When Japan’s premier asked investors on the floor of the New York Stock Exchange on Sept. 25 to “buy my Abenomics,” foreigners were concerned domestic investors weren’t backing his economic plan, according to Yuuki Sakurai, the president of Fukoku Capital Management Inc., which manages $17 billion.

“The criticism Abe got when he went to Wall Street” was “why do you need us?” Tokyo-based Sakurai said in a Feb. 17 interview. “Why aren’t Japanese buying Abenomics? Japanese have a hard time believing in a weak yen, because the yen has been so strong for such a long time.”

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