JPMorgan Keeps Yen Call as JGB Correlation Breaks: Japan Credit

Banks are sticking with forecasts for a weaker yen, even as they see less chance of extra Bank of Japan stimulus, citing a weakening relationship between the currency and bond yields.

The dollar-yen’s 60-day correlation with the yield on 10-year Japanese government debt fell to 0.01 yesterday, the least since July 1, from a 14-month high of 0.39 on March 10, data compiled by Bloomberg show. A reading of 1 means the gauges move in lock step. The yen will weaken to 108 per dollar by Dec. 31, according to the median estimate of analysts surveyed by Bloomberg, the weakest since September 2008.

JPMorgan Chase & Co., Barclays Plc and Credit Agricole SA have pushed back expectations for additional easing, as a government report showed last week inflation in Japan quickened to a 23-year high in April. The International Monetary Fund said in a May 30 statement the BOJ doesn’t need to expand bond buying to meet its 2 percent inflation target sooner, while the government has outlined measures to encourage overseas investment by pension funds that may weaken the currency.

“The yen is becoming less sensitive to the BOJ’s monetary policy,” Takafumi Yamawaki, the Tokyo-based chief rates strategist at JPMorgan, one of 23 primary dealers obliged to bid at government debt auctions, said by phone on June 2. “Even as bets for additional easing get pushed back, the yen is likely to weaken as inflation accelerates.”

Additional Easing

JPMorgan expects the yen to depreciate to 107 per dollar by year-end. The New-York based bank, which previously projected additional stimulus in July, now sees less scope, even in 2015, according to Yamawaki. Credit Agricole revised its forecast in June to no extra easing in the foreseeable future, and Barclays changed its baseline view from a July move to none this year.

Japan’s consumer prices excluding fresh food rose 3.2 percent in April from a year ago, the most since 1991, the statistics bureau report showed on May 30. The reading is estimated to be about 1.7 percent higher than it would be without the 3 percentage increase in the sales tax that took effect on April 1, according to the BOJ.

Japan’s 10-year government yield was at 0.61 percent, the lowest globally. The breakeven rate, derived from the difference between yields on conventional and index-linked bonds, rose to 1.395 percentage point, the highest since the government resumed selling of 10-year linkers in October.

Inflation Outlook

Stripping out the impact of the higher consumption levy, the inflation rate will remain at about 1.25 percent for “some time,” BOJ policy members said in the minutes of their April 30 meeting released last week. The central bank has said the price gauge will rise to 2.1 percent by the end of March 2017.

“With actual and expected inflation steadily progressing toward the 2 percent target, increasing asset purchases now to raise the probability of meeting the target sooner is not needed,” the Washington-based IMF said in a statement following an official mission to Japan. “Policy space should be preserved to address downside risks.”

The yen traded at 102.73 per dollar as of 3:35 p.m. in Tokyo today. It tumbled to a 5 1/2 year-low of 105.44 on Jan. 2. The exchange rate’s 60-day correlation with the yield on 10-year U.S. Treasuries is 0.63.

Following the sales-tax increase, gross domestic product will probably contract an annualized 3.5 percent in the second quarter, the sharpest drop in three years, economists predict. They expect the dip to be temporary, returning to 2 percent expansion in the July-September quarter.

Growth Goal

Inflation is an intermediate target for central banks in the pursuit of stronger economic growth, according to Steven Englander, the New York-based global head of Group of 10 foreign-exchange strategy at Citigroup Inc.

“It’s notable that even though the inflation numbers are picking up, the activity numbers are still on the soft side,” he said in a phone interview yesterday. Citigroup expects the BOJ to ease further in the fourth quarter. “We think when the BOJ eases, dollar-yen will rise to 110.”

The Nikkei 225 Stock Average of Japanese shares closed at 15,067.96 today, the highest since April 3, and compared with 12,362.20 on April 3, 2013, the day before the BOJ unveiled record bond buying of about 7 trillion yen ($68.2 billion) every month. The yen has weakened about 9 percent in that time, boosting Japanese exporters’ earnings.

The BOJ, which next meets on June 12-13, refrained from adding stimulus at their May meeting. Policy makers may act if the Nikkei 225 falls below 13,000, Kazuhiko Ogata, the Tokyo-based economist at Credit Agricole, wrote in a note on May 30.

“The third quarter will be a big touchstone for Abenomics,” Mana Nakazora, the chief credit analyst at BNP Paribas SA in Tokyo, said in Tokyo on May 30, referring to Prime Minister Shinzo Abe’s three-pillar growth strategy. “I expect the benefits of yen weakness to spill over to corporate profits again,” she said, adding that the yen is likely to slide to 110 per dollar by the end of the year.

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