Yen a Loser No Matter Election as Nomura Targets 125: Currencies

By Kevin Buckland and Hiroko Komiya  

Photographer: Tomohiro Ohsumi/Bloombergyen

An employee walks past a monitor displaying the exchange rate of the yen against the... Read More

As Japanese Prime Minister Shinzo Abe seeks to garner support for his policies by calling snap elections, the yen will continue to depreciate regardless of the outcome of the vote, according to Nomura Holdings Inc.
The currency’s most-accurate forecaster predicts a 4 percent decline to 125 per dollar by the end of next year, a level last seen in 2002. The yen has already tumbled 16 percent since June 30, and traded at 120.34 as of 10 a.m. in London today, after the Bank of Japan expanded the currency supply by purchasing bonds, the economy fell into recession and Abe delayed a plan to increase the nation’s sales tax.
Central-bank policy, not politics, will be the primary driver of the
yen, according to Tokyo-based Nomura, which topped Bloomberg’s forecaster rankings for the Japanese currency in the third quarter. The firm expects the BOJ to expand stimulus again next year while the Federal Reserve boosts the appeal of the dollar by lifting U.S. interest rates for the first time since 2006.
“Monetary policy will be going in polar-opposite directions,” Tomo Kinoshita, the chief economist at Nomura, Japan’s biggest brokerage, said by phone from Tokyo yesterday. “That will keep the scenario for a weaker yen intact.”
The yen fell to as low as 120.45 per dollar today, after breaching the 120 level yesterday for the first time since July 2007, and is the worst performer among 16 major currencies tracked by Bloomberg in the second half.

Predicting Victory

Abe, 60, has framed the Dec. 14 election as a referendum on his economic policies and says he’ll resign if his coalition doesn’t win a simple majority. He called the vote on Nov. 18, while delaying a boost to the sales tax after an increase in April unexpectedly pushed the economy into recession.
Opinion polls published by five Japanese newspapers yesterday showed that the coalition led by Abe’s Liberal Democratic Party will probably keep its two-thirds majority in the lower house, allowing it to override upper-house decisions.
In the projections by the Nikkei, Asahi, Yomiuri, Sankei and Mainichi newspapers, the LDP would win about 300 of 475 seats. A separate Nikkei survey this week showed approval for the government at 42 percent, down 2 points from a Nov. 24 poll.

Election ‘Uncertainties’

While the election “poses uncertainties” for the exchange-rate outlook, the result won’t alter the underlying trend of yen depreciation driven by diverging monetary policy with the U.S. and increased capital outflows, Nomura said in a client note this week.
Domestic public pension funds including the $1.1 trillion Government Pension Investment Fund, the world’s largest, will send at least 10 trillion yen ($83 billion) abroad as they seek higher returns overseas to support the world’s oldest population, according to the Nomura report.
GPIF announced on Oct. 31 it will raise portfolio allocations for foreign stocks and bonds to a combined 40 percent from 23 percent -- the same day that the BOJ unexpectedly increased the annual target for expanding the monetary base to 80 trillion yen.
Nomura joins a growing number of forecasters in racing to keep up with the yen’s decline following these announcements. The median of 50 estimates for the end of next year has weakened to 124 yen per dollar, from 115 on Oct. 31.
Nomura topped Bloomberg’s third-quarter rankings for the dollar-yen rate, which were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 currency pairs and for the past four quarters. Banks had to be ranked in at least eight of the 13 pairs to qualify for the overall placing, with 56 making the grade.

Shorting Yen

Investors including Amundi Asset Management, which oversees about $1 trillion, and Insight Investment Management Ltd., a Bank of New York Mellon Corp. unit, are betting on further yen weakness. Paul Lambert, the head of currencies in London at Insight, said the yen could “easily” fall as low as 125 per dollar this year.
“The BOJ are out-easing everybody else and likely to continue to out-ease everybody else for the foreseeable future,” Lambert said by e-mail on Nov. 25. “The yen is likely to be on a multi-quarter, multi-year weakening trend.”
James Kwok, Amundi’s London-based currency chief, agrees that BOJ policy will be the main driver of further yen weakness. He predicts that the so-called third arrow of Abe’s economic policy, which focuses on economic growth, will falter.
“Further monetary stimulus takes the pressure off reforms,” Kwok said by e-mail yesterday. “The divergence of U.S. and Japan monetary policy has never been so pronounced.”

Record Bankruptcies

Corporate bankruptcies related to the weak yen in Japan totaled 42 in November, the most on a monthly basis since the survey started in January 2013, Teikoku Databank Ltd. said in a report yesterday. The number will probably increase, especially for regional and small companies, as the effects of the latest BOJ easing become more pronounced, the data provider said.
The BOJ may also be forced to expand stimulus to prevent the slide in oil prices from derailing its goal of boosting inflation to a stable 2 percent. Japanese consumer prices have been particularly vulnerable to crude values since the nation started importing more oil after the Fukushima nuclear disaster in 2011 led it to a shutdown of all the country’s reactors.
If oil prices remain subdued, the central bank may have to adjust policy as early as April to maintain its inflation target, according to Nomura’s Kinoshita. He expects additional BOJ easing next October and predicts the Fed will raise rates in the third quarter.
Japanese consumer prices excluding fresh food and stripped of the effects of this year’s sales-tax increase rose 0.9 percent in October.
“We don’t expect the yen to continue weakening at its current rate, but we do expect it to reach 125 per dollar next year,” Kinoshita said. “The BOJ has proven how committed it is to its inflation target.”