Business

Yen weakness to persist, 100 per dollar beckons

January 22, 2013

Some expect the yen to fall to 100 per dollar in coming months, a level last seen in April 2009, from around 89 currently, as new Prime Minister Shinzo Abe's administration prepares to pump-prime the economy by issuing more bonds and pile pressure on the Bank of Japan to print more yen.

There is also speculation BOJ chief Masaaki Shirakawa, who retires in April, will be replaced by someone more amenable to Abe's wish for a much more aggressive monetary policy setting.

In addition to doubling the inflation target, a measure the BOJ adopted on Tuesday, the government has spoken of steps such adding employment to the central bank's mandate of price stability and possible changes to the bank's governance.

So the potent mix of loose fiscal policy, easier monetary policy and potential uncertainty over the central bank's independence make the yen well-placed for more weakness, analysts and traders said.

"The policy change that is taking place in Japan is very significant and will lead to sustained yen weakness," said Ian Stannard, FX strategist at Morgan Stanley.

Morgan Stanley expects the dollar to be at 100 yen by the end of this year and at 105 yen by the end of 2014, compared to the previous forecasts of 90 yen for both periods.

In the options market, investors such as macro funds which allocate funds based on economic trends, are considering bets that the dollar will touch 100 yen.

"We are certainly seeing a fair bit of demand for options targeting 100 yen in the next 12 months," said a chief options trader at an European bank in London. Also, "there is more demand for 95 yen strikes with a three- to six-month horizon."

While a move to 100 yen would be welcomed by Japanese exporters, who have for years endured and budgeted for a stronger yen, it would likely irritate policymakers in Washington who are pinning their hopes on a weak dollar to encourage US exports especially to Asia.

A sharp weakening of the yen would also raise eyebrows - and provoke possible retaliatory measures - in Europe.

Citing pressure on the BOJ, European Central Bank policymaker Jens Weidmann said on Monday that pressing central banks to pursue more aggressive monetary policies could risk a round of competitive devaluations.

Broad-based selloff

The yen's selloff has been broad based. It has fallen to a 20-month low against the euro and a four-year low against the Australian and New Zealand dollars.

The US dollar, meanwhile has risen more than 15 per cent since October to a two-and-a-half-year peak of 90.25 yen.

"We could certainly see dollar/yen at 100 in the first half of the year," said Chris Eagle, global head of foreign exchange at Marex Spectron. "This is a more significant structural change in Japan though I think the move to 100 yen will be slower than the move from 80 to 90 yen."

In the options market, demand to hedge against yen weakness has seen the one-month dollar/yen implied volatility jump to its highest since August 2011.

One-month risk reversals, a measure of the relative demand for options on the dollar rising or falling against the yen, have shown a steady demand to buy yen puts - or bets it will fall - having flipped from yen calls in November.

Asset managers, macro-fund managers and other long-term investors have all been selling the yen. Currency speculators, who are short-term investors, are already running huge bets against it, making it ripe for a correction as they look to pocket profits.

The yen rose on Tuesday after the Bank of Japan's policy measures disappointed some who had geared for a more aggressive easing, but analysts said the bounce would be short-lived.

"The dips in dollar/yen are very shallow which means it is well supported," said Peter Kinsella, currency strategist at Commerzbank, who added 100 yen was "imminently possible".

Japan has run current account surpluses - or exported capital - for years, but recent data suggests this might not be the case for much longer.

Analysts said conditions outside of Japan also favour a weaker yen.

With waning concerns around the euro zone crisis and global stock markets rising on brighter growth prospects, investors are opting out of the low-yielding yen, traditionally sought during time of financial and economic stress.

Sceptics

Some question whether the dollar's rise to 100 yen will be quite such a rapid one especially if the BOJ does not ease policy aggressively enough to beat deflation - having often fallen short of investors' expectations in the past decade.

"It is one thing pressurising the BOJ to implement a 2 per cent inflation target, but it is altogether another thing to achieve that in reality. We haven't seen such a level on a sustained basis since the early 1990s," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

Some said the 100 yen/dollar mark is what Abe's government would want to boost exports and foster economic growth but it might prove to be a bit of struggle getting there.

"Even if this is desirable, it is unlikely that the yen would weaken beyond 100 yen per dollar and remain at that level purely based on potential easing by the BOJ," Taisuke Tanaka, strategist at Deutsche Bank, said in a note. — Reuters


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