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Yen will return to strength, former BOJ official predicts

Bloomberg

The yen will rally to 100 per dollar in the first half of next year because the Bank of Japan won’t be able to expand monetary easing by enough to repeat the weakening effect it had this year, a former official of the central bank said.

The so-called Kuroda Shock in April set off the yen’s biggest drop since October 2008 and pushed 10-year bond yields to a record low after BOJ Gov. Haruhiko Kuroda pledged to double the monetary base to achieve a 2 percent inflation target. The bank won’t be able to spring a similar surprise on the market next year, said Tohru Sasaki, who worked at the BOJ from 1992 to 2003 and is now JPMorgan’s Tokyo-based head of Japan rates and currency research.

“Next time the BOJ can’t beat market expectations,” he said in an interview Thursday. “It’s already done so much.”

Kuroda will increase total debt buying by ¥10 trillion for the 12 months ending March 31, 2015, from the current pace of ¥7 trillion a month, at the BOJ’s April 30 meeting, JPMorgan predicts. He will double purchases of exchange-traded funds to ¥2 trillion a year, JPMorgan says. Nineteen economists in a Bloomberg News poll in October said the BOJ will add stimulus in the second quarter of next year, with seven saying it will ease in the July-September quarter.

The yen will reach as low as 104 per dollar before the BOJ’s April meeting, after which investors disappointed by the scope of Kuroda’s policy announcements are likely to buy back the Japanese currency, Sasaki said.

Demand for the yen may wane again during the second half, driving it down as low as 110 by year-end, should Japan maintain economic growth amid a global recovery, Sasaki said.

The yen tumbled another 3.4 percent on April 4 when Kuroda announced his easing measures. The benchmark 10-year government bond yield plunged to touch a record 0.315 percent on April 5, from 0.56 at the end of March.

The economy will expand 3.6 percent this quarter from the previous period, and accelerate to 4.8 percent growth at the start of 2014, according to the median estimate of economists polled by Bloomberg News.

The consumption tax increase in April will pose a major challenge to the economy, which JPMorgan expects will shrink 4.5 percent in the second quarter.