Plunging yen bottoms out

The Japanese yen is likely to weaken this year but not by much, according to some analysts.

The bearish outlook follows the Bank of Japan’s move last week to maintain its stimulus programme, which is aimed at lifting the country out of recession and rising expectations of a rate hike by the US Federal Reserve in the summer.

The yen was at 119.65 against the dollar yesterday afternoon UAE time, 0.35 per cent higher than on Tuesday. Japanese stocks also rose, with the Nikkei 225 index adding 0.2 per cent to close at 19,746.20 points.

There is consensus for a decline to ¥125 this year that extends to ¥128 next year.

However, some investment banks disagree.

The yen’s advance of 4.9 per cent this year against its major peers on an improving economic outlook and positive economic data, making it the strongest gainer after the Swiss franc, Bloomberg Correlation-Weighted Indexes show, is a harbinger of future appreciation after Japan’s exports posted annual gains for six straight months, according to JPMorgan Chase.

JP Morgan, whose contrarian call that the yen would strengthen in the first half of last year proved correct, now says the currency’s two-and-a-half-year race to the bottom is running out of fuel.

Even though Japanese companies and investment funds are shipping increasing amounts of cash overseas, the yen’s 30 per cent slide versus the dollar since the prime minister Shinzo Abe came to power in late 2012 is boosting the nation’s exports to such a degree that the currency is close to finding a floor, according to JP Morgan’s Tohru Sasaki.

“There is a high probability this year will mark the yen’s low for now,” said Mr Sasaki, a former BoJ official who is now JP Morgan’s head of Japan rates and currency research.

“The impact of the trade balance will likely be felt in full next year, toppling the impact of outbound investment flows. I think the yen will strengthen next year.”

Goldman Sachs in late November had also raised its forecast for the currency pair to ¥130 by the end of the year.

Mr Abe’s stimulus programme – which includes central bank bond buying – is starting to revive trade flows. Japan’s exports rose more in February than economists forecast – they were up 2.5 per cent versus forecasts of a 0.3 per cent increase, while slumping oil prices have helped to cut imports this year.

JP Morgan estimates Japan’s trade balance will swing back to a surplus of ¥7 trillion this year from a record ¥10.4tn deficit in 2014. The current-account surplus will swell to ¥22tn in 2015, approaching 2007’s record of ¥24.9tn, and snapping four years of declines, according to JP Morgan.

Even so, Mr Sasaki said the yen is likely to have one more spurt of declines this year before reversing course. The yen will probably weaken more than 6 per cent to ¥128 per dollar by December, then rally in 2016, he said.

A level of ¥128, last reached in 2002, would be difficult to sustain next year as improving trade flows support the yen, while the impact of divergent monetary policy becomes less potent, according to Mr Sasaki. The Fed this month lowered its forecasts for interest rate increases, halting a dollar rally that had been driven by speculation it would raise borrowing costs as soon as June.

The BoJ on March 17 kept a pledge to expand the monetary base at an annual pace of ¥80tn, with the governor Haruhiko Kuroda sticking to his view the economy will continue a moderate recovery and policymakers are on track to meet their inflation goal.

“I have a feeling that this yen weakness will be like the final pop from fireworks before they go out,” Mr Sasaki said.

In December 2013, when the median estimate of analysts surveyed by Bloomberg was for the yen to trade at ¥104 by mid-2014, Mr Sasaki said it would strengthen to ¥100. It climbed 3.9 per cent to 101.33 in the first six months of last year, the strongest first half since 2010.

JP Morgan’s model for the yen’s real exchange rate shows that a level of ¥128 per dollar would be almost as weak in purchasing power as in 1982, when it was at ¥277.65, the least since the Bretton Woods exchange rate regime collapsed in 1971. The yen is 35 per cent undervalued based on differences in producer price changes, the biggest deviation among major currencies.

A current account surplus in line with JPMorgan’s forecasts would translate to ¥98 as fair value for the currency in 2016, based on the bank’s correlation model.

The underlying turnaround in prospects for the yen is highlighted by the currency’s gains this year against 13 of 16 major counterparts even as money flowed abroad. Japanese investors were record net buyers of foreign stocks in the past 11 months and companies have announced US$39bn of overseas acquisitions this year, on track for the most in any quarter since the last three months of 2012.

Mr Sasaki is not the only analyst who sees the pickup in exports overwhelming the impact of investment leaving the country. Naoki Kamiyama, the chief strategist at Nikko Asset Management in Tokyo, expects the currency to remain resilient against the dollar as the Fed raises interest rates.

The speed at which the yen weakened since 2012 is unsustainable, he said last week.

“Japanese fundamentals are improving,” Mr Kamiyama said.

“The yen is under moderate weakening pressure against the dollar, but the downward pressure may be weaker than for other currencies.”

* with Bloomberg News


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