Top Yen Strategists Have Very Different Outlooks on the Currency

  • Sasaki cites trade tensions, while Ikeda keys in on China
  • Five questions show gap in outlook: 99 versus 120 per dollar

Sharma: Dollar-Yen Is Classic Policy Divergence

Japan’s currency went on a roller-coaster ride this year, soaring against the dollar for much of 2016 then sliding back down. When it comes to the outlook for 2017, it turns out the market’s top two analysts have views that could hardly be further apart.

Tohru Sasaki

Source: JPMorgan Chase & Co.

JPMorgan Chase & Co.’s Tohru Sasaki and Nomura Holdings Inc.’s Yunosuke Ikeda sit side by side at the top of this year’s analyst rankings by Nikkei Veritas, a weekly financial paper whose surveys are closely watched in Japan. Sasaki, a former Bank of Japan currency official who ranks no. 1, holds one of the most bullish yen forecasts among the more than 50 compiled by Bloomberg. Ikeda, no. 2 in the latest poll, is a longstanding yen bear who has spent his entire two-decade career at Japan’s biggest brokerage.

Yunosuke Ikeda

Source: Nomura Holdings Inc.

Bloomberg asked each of them the same five questions on their perspectives on the yen. Their answers appear below, edited for length and clarity.
1. What surprised you most in 2016, and how does it affect your outlook for 2017?

“The biggest surprise was the sharp steepening of the yield curve, not just in the U.S. but globally. Once the market calms down and we see what actually happens in the U.S. after Jan. 20, maybe we’ll see this was a bit of an overshoot or overreaction, and dollar-yen will go lower.”
“Trump’s fiscal stimulus will have some positive impact on the U.S. economy, but it won’t be really significant.”

“What really surprised me is the market reaction after Trump’s victory. But actually, I don’t think the main driver is expectations for Trump’s policies. Rather, the market is catching up to the reality that the global economy is moving in a very healthy direction, in particular stemming from the strong recovery in China. That makes me more optimistic about next year.”

2. What is your dollar-yen forecast for the end of 2017? Walk us through your thinking.

“Our forecast is 99.”
“We expect protectionism in the U.S. will cause dollar weakness, particularly against the yen. If Trump really wants to convince corporations to stay in the U.S., the dollar has to depreciate. When that happens, the yield gap will have less effect on the currency market.”

“My forecast is 120, which assumes two Fed rate hikes next year. If we raise our assumption to three rate hikes, I’ll increase my forecast to 125.”
“What really matters is China. The Chinese economy is the engine for the global economy. As long as actual activity is moving in the right direction, I think U.S. interest rates will be well supported.”

3. Shorter term, how much further does the current dollar rally against the yen have left to run? What will stop it?

“If the U.S. 10-year yield were to reach 3 percent, dollar-yen could go to something like 125. But probably we’re near the top between 118 and 119. The dollar and U.S. yields tend to peak around a Fed rate hike, so maybe somewhere toward the end of the year.”

“The high for dollar-yen should be 120, this month or next. Beyond that, the market has to think of Trump’s actual policy delivery, and it’s fairly unrealistic for the market to move ahead of a policy announcement.”

4. What is the biggest risk to your forecast?

“The risk is if the Fed hikes more than twice next year, and the yield just keeps going higher, with the dollar rallying in tandem. And then that the U.S. administration accepts a stronger dollar.”

“The key question for 2017 is the sustainability of the Chinese real estate market.”
“The moment of judgment will come in the middle of the year. If the Chinese economic situation looks much weaker and the Fed still raises rates, there will be a big risk-off move in the market.”

5. More broadly, what’s the biggest wild card in 2017?

“If something really bad happens and people start buying back yen -- like the global economy slows down and equity markets collapse, or Trump is so protectionist that it jeopardizes global trade -- dollar-yen may decline much more sharply than we expect.”
“According to my calculations, the equilibrium level is around 90.”

“If the U.S. demonstrates good productivity growth, the economy has the potential to enjoy a sustainable recovery for a much longer period of time. That would allow investors to think about the rate-hike cycle continuing into 2018 and 2019. In such a situation, dollar-yen can go to 130.”

— With assistance by Chris Anstey

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