Analysis – ‘It’s a broken car’: Investors see relentless decline in yen

Analysis – ‘It’s a broken car’: Investors see relentless decline in yen

Written by Kevin Buckland and Ray Wi

TOKYO/SINGAPORE (Reuters) – Japan’s threats to intervene in the currency may slow but will not prevent the yen from rallying to three-decade lows before the end of the year, market analysts and fund managers said.

The yen has already lost more than 20% of its value this year, hitting a 24-year low of 144.99 per dollar last week, including a drop of more than 7% over the past month alone.

And while it found a short respite after the Bank of Japan conducted rare audits of market levels this week, which is seen as a prelude to potential direct intervention, most banks and analysts expect the slide to continue.

They say the yen could soon reach a 32-year low of $150 or more as the Bank of Japan (BOJ) remains isolated in its hawkish stance on policy while its global peers aggressively raise interest rates to fight inflation.

The Bank of Japan’s next policy update comes on Thursday, as it is mostly expected to pressure yield curve control policies that set the short-term interest rate at -0.1% and the 10-year yield around zero through massive bond purchases.

Adding to the contrast with other developed markets, the decision will come one day after the US Federal Reserve’s latest rate-setting announcement, as traders are pricing in 75 basis points for a full rate hike which will take rates there above 3%.

Such dynamism is meant to keep the yen low, and the fact that it is already “supervalued” by many measures means nothing until the BoJ changes policy, said Toru Sasaki, head of Japanese markets research at JP Morgan Securities in Tokyo.

“We’re riding a car on a slope with broken brakes…Unless we fix the brakes, it’s going to keep going downhill,” Sasaki said. “There is no reason to believe that the yen will stop at 145 or 150 as long as all fundamentals remain the same.”

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Masayuki Kishikawa, chief macroeconomic strategist at Sumitomo Mitsui (NYSE:) Asset Management, agrees that the Bank of Japan will imply a persistently weak yen. “Once the dollar crosses the 145 yen line, the next target should be 150,” he said.

The Bank of Japan is the last remaining pigeon among the group of ten central banks. The Reserve Bank of New Zealand was one of the first banks to walk out of the gate in nearly a year and even holdout companies like the Swiss National Bank have tightened their policy.

Japan’s economic situation is certainly different. Prices are rising, but mainly due to energy costs and exacerbated by a weak currency. Wage growth remains tepid, and consumer inflation is just above the Bank of Japan’s 2% target compared to 8.3% in the US and around 10% in Britain.


The hurdle for the BoJ to actually buy the yen to strengthen it is high, as analysts expect that Japan will find no support for this reason from the US authorities or other major central banks.

Shinichiro Kadota, Chief Forex Strategist at Barclays (LON :), says the US would be loath to join any intervention, given that it needs a strong dollar to tame inflation at home.

Despite this, Barclays sees the yen gradually recovering towards 130 next year as US inflation peaks and the Fed slows the pace of tightening. But it all depends on the Fed, as the stagnation of the Bank of Japan’s policy makes it just a passenger.

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“The Federal Reserve is leading, and the Bank of Japan is in the back seat,” Kadota said.

Nomura, Japan’s largest bank, agrees that the Federal Reserve is the focus of dollar-yen traders.

โ€œThe yen only stops falling when the Fed stops raising rates in my view,โ€ said Naka Matsuzawa, chief Japanese macro analyst at Nomura, who sees 150 yen as the yen’s next target.

“The Bank of Japan will not even consider policy normalization before knowing where the Fed stops, and whether the global economy can avoid a recession.”

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