Yen’s Slump Seen Longest Since Gold Standard Ended: Currencies

By Kevin Buckland and Hiroko Komiya  

Photographer: Tomohiro Ohsumi/Bloomberg

A visitor looks at an electronic ticker above the trading pit at the Tokyo Stock... Read More

If your New Year’s wish is for more yen weakness, get ready to celebrate.
After sliding more than 36 percent since the end of 2011, the median estimate of economists and strategists surveyed by Bloomberg is for an additional drop of almost 4 percent through the end of 2015 from 120.33 per dollar today in Tokyo. A fourth straight annual decline would be the yen’s longest losing streak on record, or at least since the global monetary system broke from the gold standard in 1971.
The currency market is bracing for more yen-debasing stimulus measures from the Bank of Japan after government data last week showed little evidence of a rebound in the
world’s third-largest economy. Efforts to suppress borrowing costs have already caused two-year government bonds yields in the Asian nation to fall to their lowest since 2010 relative to what investors can get on similar maturity U.S. Treasuries.
“Based solely on the fundamental drivers of a widening interest-rate spread and increased yen outflows, it wouldn’t be odd to see the yen weaken to 140 per dollar over the next two years,” Yunosuke Ikeda, Nomura Holdings Inc.’s Tokyo-based head of currency strategy, said Dec. 24 by phone.

Abe’s Mandate

Nomura was the top forecaster of the yen-dollar exchange rate over the four quarters ended Sept. 30, based on margin of error, timing and directional accuracy.
Japan’s Prime Minister Shinzo Abe won a renewed mandate at the ballot box this month for his economic policies of monetary easing, fiscal stimulus and structural reform, the so-called three arrows of Abenomics. The yen has weakened 33 percent against the dollar since he called for unlimited monetary easing in November 2012, a month before taking office.
Among Abe’s reforms has been a revamp of the 131 trillion yen ($1.09 trillion) Government Pension Investment Fund, the world’s biggest, to shift more assets overseas. GPIF announced on the same day as the BOJ expanded easing that it would raise portfolio allocations for foreign stocks and bonds to a combined 40 percent from 23 percent.
The BOJ on Oct. 31 added to what was already a record stimulus program, giving it the capacity to buy every new bond the government issues. That pushed 10-year yields to a record low on Dec. 26. In contrast, the U.S. Federal Reserve is moving to raise interest rates next year for the first time since 2006, and Chair Janet Yellen signaled it may happen as soon as April.

Yield Divergence

At negative 0.04 percent, Japan’s two-year bonds yielded about 0.78 percentage point less than similar maturity Treasuries last week. In February, the gap was 0.21 percentage point.
After weakening about 13 percent this year, the yen’s depreciation will probably be more measured in 2015, ending the year at 125 per dollar, according to the median estimate of about 50 economists and strategists surveyed by Bloomberg. For some forecasters, that has more to do with the dollar’s strength getting too extreme and hampering the U.S. economic recovery.
“As the dollar strengthens, it builds headwinds against further appreciation,” Minori Uchida, the head of global-market research at Bank of Tokyo-Mitsubishi UFJ Ltd, said by phone Dec. 24. “While it could overshoot, 130 yen per dollar seems a bridge too far.”

‘Surprisingly Slow’

Nomura sees the yen at 125, as traders who have profited from the yen’s extended decline trim positions that are based on further weakness. The firm estimates that about 17 yen of the current exchange rate is based on speculation rather than fundamental measures.
“Because of periodic position unwinding by speculative investors, the yen’s decline will be surprisingly slow,” Nomura’s Ikeda said.
Hedge funds and other large speculators cut bearish yen positions for a second week, to a net 86,927 contracts in the five days ended Dec. 16, the latest data from the Washington-based Commodity Futures Trading Commission show.
Money flows out of Japan are accelerating. Pension funds bought 2.2 trillion yen of overseas securities in the third quarter, the most on record dating back to 1998, according to the BOJ’s flow-of-funds report this month.
Nomura estimates Japanese pension funds in search of higher yields will send a net 12 trillion yen overseas in fiscal 2015, forming the bulk of a total 19.4 trillion yen exodus. UBS Group AG sees pensions sending 13.6 trillion yen out of the country.
Abe says his policies are aimed at ending decades of deflation rather than a achieving a weaker currency. BOJ Governor Haruhiko Kuroda reiterated last week, he’s ready to adjust policy without hesitation if needed to stay on track to his 2 percent inflation target. Stripped of the effect of April’s sales-tax increase, core consumer prices rose 0.7 percent in November, slowing for a fourth month.
“It’s possible the yen could weaken another 20 percent over the next two years” amid pressure from Abenomics, low interest rates and pension fund outflows, Philip Moffitt, head of Asia-Pacific fixed-income at Goldman Sachs Asset Management in Sydney, said in a telephone interview on Dec. 18. “Everyone wants a weaker currency.”