Analysis-Japanese yen expected to suffer a bit longer as BOJ balks at shrinking
TOKYO (Reuters) – The developed world’s most accommodating central bank and companies keen to put their liquidity to work abroad have combined to make the Japanese yen one of the worst in the world this year, and this weakness could persist some time.
Factors at home and abroad conspired to cause the yen to fall 6% against the US dollar this year.
Unlike other major central banks that are beginning to face inflation risks and are considering a withdrawal of emergency pandemic stimulus measures, the Bank of Japan has not only been grappling with deflation, but was particularly reluctant to publicly suggest a reduction.
Japan has also been slower than most countries to get its population vaccinated against COVID-19 and return to normalcy. Its economy is contracting and the absence of foreign tourists might mean no real boost from the postponement of the Tokyo 2020 Olympics this summer.
“I think the yen is going to be the one that is really going to struggle as the global economy picks up,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia.
While a rally could undermine the dollar, which traditionally goes against business cycles, the yen has even stronger safe-haven benchmarks and is likely to underperform, he said, projecting the yen. to 116 in a year compared to the current 110.
Indeed, as investors bet on the economic recovery in Europe and the United States, supporting global equities and bond yields as well as the dollar, the yen’s status as a cheap and secure funding currency has been strengthened. .
“The carry trade is very hot right now, and that doesn’t bode well for the yen,” said Bart Wakabayashi, director of the Tokyo branch of State Street Bank and Trust.
“I don’t know what the story would be to strengthen the yen at this time.”
In late March, as 10-year U.S. Treasury yields – with which the Japanese currency has a close inverse relationship – reached one-year highs above 1.77%, the yen hit a low of ‘a year at 110.97 per dollar.
But even after US yields retreated below 1.6% as the Federal Reserve resisted speculation about a rapid reduction in its asset purchase program, the yen did not budge much. .
Part of this weakness can be explained by a sudden explosion of overseas acquisitions by cash-rich Japanese companies.
Data from mergers and acquisitions (M&A) consultancy firm Recof shows that there were 210 foreign acquisitions by Japanese companies in the first four months of 2021 worth 3.71 trillion yen (33, $ 64 billion), triple the total value a year earlier.
“Interest rates are an important factor influencing exchange rates, but not the only one,” said Osamu Takashima, chief currency strategist at Tokyo-based Citigroup. “M&A flows drive the yen down against the dollar.”
The yen’s divergence from US yields, and its continued weakness until April even as the dollar fell sharply, has caused market participants to disagree on its outlook.
“The divergence in monetary policy may explain some degree of yen weakness, but not this level,” said Tohru Sasaki, head of Japanese market research at Tokyo-based JPMorgan. Sasaki says the one-time nature of M&A exits combined with the yen’s dislocation from fundamentals should argue for a recovery to 105 or 106 levels.
On a trade-weighted basis, the nominal yen has fallen 6.2% so far this year to reach a level not seen in 2018. This is largely due to the surge in the Chinese yuan. , which constitutes a third of the basket. , more than US and European currencies combined.
“The yen seems both stuck and cheap,” said Kit Juckes, global head of currency strategy at Societe Generale, in a research note, adding that he “was only waiting for better news on Covid and economic reopening to spread its wings “.
Meanwhile, hedge funds and other speculators are increasing bets against the yen. Data from the US Commodity Futures Trading Commission shows a surge to the largest net short yen position in nearly two years at the end of April.
For others, like Shusuke Yamada, head of foreign exchange and rates strategy in Japan at Bank of America, the possibility of the Fed signaling some form of monetary tightening and the continuation of the rise in equities implies further weakness in the yen. . Yamada estimates that the yen could go as high as 115 to the dollar and end the year at 113.
“The BOJ will be the laggard, and probably the biggest laggard, so I think that’s on the minds of investors,” he said.
($ 1 = 110.2800 yen)
Reporting by Kevin Buckland and Hideyuki Sano; Editing by Vidya Ranganathan and Kim Coghill