What does the Syrian pound have in common with the Yemeni rial and the Afghanistan afghani? Those currencies have done better against the US dollar this year than the Japanese yen. The yen has fallen more than 7 per cent against the dollar this year, putting it among the world’s worst performers.
Despite the slide, and after two years of steady yen appreciation, many analysts are reluctant to call a decisive turn in the dollar/yen exchange rate.
The trigger for the yen’s fall was clear enough: the Valentine’s day announcement from the Bank of Japan that it would add Y10tn ($120bn) to its asset-purchasing programme, while adopting a 1 per cent “goal” for inflation. Within a week the yen had dropped 5 per cent against the dollar, closing on the Y80 level.
That slide, which culminated in the dollar hitting 11-month highs above Y84 last week, was more than Japan’s finance ministry had managed with its previous two market interventions, in August and October last year, when it sold Y13.6tn to push down the yen.
Yet analysts note that the big difference between the government’s interventions and the BoJ’s monetary easing, is that the central bank had a much more benign backdrop.
In the second half of last year, financial markets were grappling with the potential disintegration of the eurozone and renewed fears of a double-dip recession. European Central Bank loans totalling €1tn for commercial banks in the eurozone, coupled with stronger economic data from the U.S., have eased those concerns. Investors, moreover, have reined back expectations of extra monetary stimulus from the Federal Reserve . Even after the BoJ refrained from further major easing at its monetary policy meeting in March, the yen fell for a sixth week, its longest losing streak in three years.
If global risk appetite wavers, then, the fall in the yen could easily reverse. Indeed, on Thursday it strengthened as survey data pointed to weaker than expected euro-area manufacturing activity. The yen is still viewed as “the ultimate safe-haven asset”, says Torrie Callander, corporate dealer at Global Reach Partners, a foreign-exchange group in London: “One bit of really bad news could still change the outlook.”
True, speculators are no longer wary of betting against the yen. Currency speculators recently increased their bets against the yen to the highest in nearly five years, according to Reuters, citing data from the US-based Commodity Futures Trading Commission.
More yen-selling pressure should come with the shift in Japan’s energy policy away from nuclear power and the emergence of earthquake-related reconstruction demand later in the year. Both point to higher imports and a faster deterioration of the current account balance. Masafumi Yamamoto, chief forex strategist at Barclays Capital in Tokyo, says the risk of the dollar falling back towards the Y75 level, which prompted Tokyo’s intervention last year, has been “dramatically reduced”.
Some analysts, though, say the recent run has got ahead of itself. As the BoJ has pointed out, recent years have shown a strong correlation between the gap in yields on two-year US government debt and those on Japanese debt and the dollar/yen exchange rate. This gap is now at its widest since July last year, following a jump in US bond yields.
In the past few weeks, the dollar/yen rate has “overshot” these bond market signals, says Deutsche Bank. According to the bank’s calculations, the exchange rate should be below Y80, rather than hovering at about Y83.
Nor are rising U.S. yields necessarily a precursor of things to come, says Adam Cole, global head of forex strategy at RBC Capital Markets. Demand from banks should support short-dated bonds, while recent positive economic data in the US may have been flattered by an unusually mild winter. “If the current move in yields is premature, then by next quarter, [dollar/yen] will resume its trend decline.”
Some are also questioning the BoJ’s resolve to continue easing until Japan achieves 1 per cent inflation. More than five weeks on, it has yet to begin buying the extra assets, while its bank reserves have actually fallen, from Y27tn to Y25tn. Further, the board has stressed that the price-stability “goal” is not a target that would commit the BoJ to any particular time span. “Without a sufficient sustained expansion in the bank reserves and monetary base, we believe the yen could spring back upward,” says Seiji Adachi, Tokyo-based senior economist at Deutsche Bank.
Even if the yen keeps sinking, say analysts, it will remain at the mercy of forces beyond the control of either the central bank and government. Norio Nakajima, chief executive of Diam Asset Management, says: “The US dollar is still the pitcher and the yen is still the catcher.”