Kuroda Softens Yen Stance as Export Pain Evaporates

Foreign-exchange traders detect a softening in Bank of Japan Governor Haruhiko Kuroda’s stance toward the stronger yen.

While the currency has risen 3.9 percent this year to 101.38 per dollar, the central-bank chief signaled this week he’s satisfied with the exchange rate. Kuroda told reporters in Tokyo the yen is no longer excessively strong and that the BOJ is on its way to meeting its inflation target.

“He seems to be just ready to sit, wait, watch,” Sean Callow, a Sydney-based strategist at Westpac Banking Corp., said by phone on July 16. Westpac sees the yen climbing to 100 versus the greenback by the end of this year.

Kuroda made his comments after this month’s policy meeting, where he refrained from expanding a plan to increase the monetary base by 60 trillion yen to 70 trillion yen ($691 billion) per year unveiled during his first whole month as BOJ governor. Strategists are following his lead and scaling back forecasts for a weaker currency, with the median of 60 estimates in a Bloomberg survey predicting a drop to 105 by year-end, compared with a call for 110 in April.

The aim of the BOJ’s unprecedented bond purchases was to end 15 years of crippling deflation in part by flooding the economy with yen, debasing the currency in the process. The strategy has helped push the yen down about 25 percent from its all-time high of 75.35 in 2011, helping exporters.

Toyota’s Comfort

Kuroda’s more accepting tone when talking about gains in the exchange rate represents a growing realization among officials and companies that the yen is unlikely to fall much further, and that it’s no longer at levels that may render exports uncompetitive. The economy grew 1.6 percent in the first quarter, the fastest pace since 2011.

Toru Umemori, the head of the BOJ’s branch in the western city of Nagoya, in the same prefecture as Toyota Motor Corp., told reporters on July 7 that companies in that region are comfortable with the exchange rate and don’t want further weakness in the Japanese currency.

The currency is weaker than the so-called break-even rate of 92, above which exporters start to lose money, according to an annual survey published in February by the Cabinet Office.

“The BOJ tends to avoid commenting much on the yen, but it does care about what companies think of the currency,” Masafumi Yamamoto, a former central-bank analyst who’s now president of Praevidentia Strategy Ltd. in Tokyo, said by phone July 17. “With Japanese firms not eagerly asking for further yen weakness, and inflation rising toward 2 percent along with the BOJ’s script, there’s little reason for it to add stimulus.”

Missile Attack

Japan’s currency has been supported this year by investors seeking a haven from a slowdown in developing economies from China to Brazil and global turmoil such as the Ukraine crisis. The yen strengthened 0.5 percent yesterday as a Malaysia Airlines jet was shot down over the east of the country in an attack that the government in Kiev blamed on pro-Russian rebels. The separatists denied the accusation.

That’s helping the yen head for its biggest annual gain versus the dollar since 2011. It’s the best performer this year among a group of nine developed-nation peers after the New Zealand and Australian dollars, climbing 4 percent versus the basket, according to Bloomberg Correlation Weighted Indexes.

Japanese exporters shouldn’t rely on a weaker currency, economists at the Federal Reserve Bank of New York wrote in a July 7 post on the Liberty Street Economics blog. A drop in the yen would actually hurt some of them by increasing fuel-import costs, they wrote. Japan imports almost all of its oil.

‘Less Benefit’

“Even for exporters, the impact of a weaker yen varies among industry sectors, as many of them are now importing intermediate goods,” Minori Uchida, the head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., said by phone on July 16. “The higher the ratio of overseas production is, the less firms will benefit from a weaker yen.”

Japan’s currency will drop to 106 by the end of this year, mostly driven by demand for the dollar, Uchida said.

The BOJ’s Kuroda said this week there’s no chance Japan’s inflation rate will fall below 1 percent, compared with the bank’s 2 percent target. Consumer prices for May, excluding the direct effects of a consumption-tax increase, was 1.4 percent, according to a BOJ monthly economic report published yesterday.

The difference between Japan’s expansionary monetary policy and the U.S. tapering its bond purchases will cap yen gains versus the dollar, Kuroda said. While the BOJ maintained its record stimulus program this week, it wasn’t extended.

“Nothing from the Japanese data suggests that an imminent easing is required,” Divya Devesh, a Singapore-based analyst at Standard Chartered Plc said by phone on July 16. “We’re looking for a stronger dollar in the medium term and as a response to that, dollar-yen should be higher, even if the BOJ doesn’t do any further easing.”

The firm sees the yen falling to 110 by year-end.

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