SocGen bear warns of yen-dollar ‘tidal-wave’

Bank of Japan headquarters in Tokyo, Japan
Tomohiro Ohsumi | Bloomberg | Getty Images

Societe Generale's notoriously bearish strategist, Albert Edwards, believes the Japanese currency will sink to 145 yen against the U.S. dollar by the end of March, forcing devaluations across the Asian region and sending a "tidal wave" of deflation towards the West.

"I expect the key (120 yen to the dollar) support level to be broken soon and the lows of June 2007 and February 2002 to be rapidly taken out," he said in his latest research note, released on Thursday morning.

"It seems entirely plausible to me that once we break (the 120 yen level), we could see a very quick 25 yen move to 145."

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The dollar hovered near a recent seven-year high against the yen on Thursday morning, with expectations that an ultra-dovish Shinzo Abe, the Japanese Prime Minister, will call snap elections in December and build a bigger mandate to continue the aggressive stimulus and reflationary policies that the country has witnessed in the last two years.

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The Japanese currency has fallen by 35 percent since the start of 2013 against the dollar as Japan has tried to force itself out of decades of stagnation.

In late October, the Bank of Japan announced it would expand annual government bond purchases to 80 trillion yen, from 50 trillion yen previously, and extend the duration of bonds it holds to about 7-10 years. Alongside some other easing measures, this has allowed the dollar to rise to 115 yen from around 109.

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"Japan is cheap and getting cheaper. The dollar, having already punched through its 30-year downtrend is expensive and about to get more so," Edwards adds in his note, saying that hotels in Tokyo are now surprisingly cheap compared to their New York counterparts.

Policymakers and central banking heads in Japan are on different level than those in Europe, according to Edwards, who said they were willing to really do "whatever it takes." This devaluation, which he believes is just another round of the what is often called "currency wars" by analysts, will lead to similar moves by officials in South Korea and China.

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"These will be bone-crushing, deflation-inducing moves," he warns, with a weaker currency meaning goods will be much cheaper in the region than in the West, putting further strain on European and U.S. manufacturers. Honda, Nissan and Toyota are just three Japanese companies that have seen promising profitability predictions due to the falling yen.

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Other currency strategists are certainly preparing for the break above the 120 level for the yen, but Edwards' bet is clearly bolder and higher than the rest of the field.

The Societe Generale global strategist is known for his markedly pessimistic predictions but does not always get it right. In September 2012, he announced the U.S. was in recession and Wall Street would soon react, and warned of an "ultimate" death cross for the S&P 500—where the 50-month moving average falls below the 200-month moving average.

Instead the S&P 500 continued to rally, and has gained almost 50 percent since Edwards' pronouncement.

- By CNBC's Matt Clinch