Early Clinton Years Show Dollar-Yen Future, Top Analyst Saysby and
Look to Clinton-Bentsen, not Reagan-Volcker, for precedent
Sasaki sees protectionist narrative overcoming yield lure
When veteran currency analyst Tohru Sasaki thinks about the outlook for 2017, he’s reminded of days when he was at the Bank of Japan two decades ago, vainly trying to halt a surging yen.
"That was really scary," Sasaki, who left the BOJ for JPMorgan Chase & Co. in 2003, said in an interview last week. The dynamics favoring the yen against the dollar in 1993 and 1994 were irrepressible, and rendered Japan’s interventions useless. "It didn’t work at all."
Those same dynamics are going to make a comeback in 2017, according to Sasaki. Just as in the early years of President Bill Clinton’s administration the foreign-exchange market focused on rising trade tensions and a widening American trade gap, the advent of Donald Trump in the White House will put a spotlight on U.S. protectionism, he said.
Sasaki, who’s bullish yen calls have been upended in recent months thanks to rising U.S. bond yields, sees the dollar sinking to 99 yen by the end of next year. It traded at 117.49 at 7:30 a.m. in Tokyo Thursday. His view is a contrast with the median projection of 115 among analysts surveyed by Bloomberg.
"Especially in the past month a higher yield has caused a higher dollar -- but I think it won’t continue," said Sasaki, who heads Japan markets research at JPMorgan in Tokyo. "When the U.S. administration adopts a severe protectionist stance, and there’s heightened trade tension with China, it’ll naturally cause a sentiment that maybe a weaker dollar is necessary for the U.S. economy."
Clinton took office in 1993 after a campaign that featured a get-tough approach with Japan, the largest source of the U.S. trade deficit at the time. The effort to press for greater market access for American producers culminated in a 1995 threat to slap 100 percent tariffs on Japanese luxury cars. Clinton’s first Treasury chief, Lloyd Bentsen, famously sent the dollar tumbling in 1993 when he said a stronger yen would help the U.S. with its trade.
For trade protectionists, the bugbear has shifted from Japan to China -- a main target for Trump during the presidential campaign. Yet the yen could be a particular casualty of dollar weakening thanks to Japan’s status as the world’s biggest net creditor. And Japan continues to run its own trade surpluses.
But the narrative of the moment is a replay of the early 1980s, when President Ronald Reagan implemented fiscal stimulus and Federal Reserve Chairman Paul Volcker tightened monetary policy -- a recipe that stoked the dollar. Sasaki recognizes the risk is the Trump reflation play will continue, and said if U.S. 10-year yields climb to 3 percent, the dollar might reach 125 yen.
Still, he comes back to the idea that if Trump wants companies to stay in the U.S., "the dollar has to depreciate."
For a potential early sign of how the new team views the dollar, investors may want to pay close attention to Steven Mnuchin’s Senate confirmation hearing. He’s Trump’s pick for Treasury secretary, the job that traditionally oversees currency policy. Those hearings are typically set within days of a new president’s January inauguration.