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Yen’s fading clout threat to BOJ inflation goal

by Mariko Ishikawa, Masaki Kondo, and Hiroko Komiya

Bloomberg

The rising cost of overseas travel and imported goods such as Apple computers is spurring concern in Japan’s bond market that Prime Minister Shinzo Abe’s success in fueling inflation will be short-lived.

ANA Holding Inc. and Haagen-Dazs Co. increased prices as the yen’s inflation-adjusted value against Japan’s trading peers dropped to levels going back to 1994, according to an index compiled by Bank for International Settlements. Investors expect the gains in the cost of living to slow to an average of 0.5 percent by around 2016 from 1.3 percent in January, inflation swaps show.

Abe’s unprecedented effort to end deflation succeeded in spurring economic growth and boosting consumer prices to a five-year high, partly by encouraging an 8 percent slump in the yen’s nominal value in the past year. The rebound in the economy may become unhinged if analysts are right in estimating the yen will fall to 110 this year, according to Koichi Hamada, an adviser to Abe.

“Abenomics is like gambling — it boosts consumer prices and inflation expectations first, hoping that wages will keep up with those, but there’s more downside than upside,” said Makoto Noji, a senior debt strategist at SMBC Nikko Securities Inc., one of the 23 primary dealers obliged to bid at government bond auctions. “Inflation won’t grow because Japanese households are not feeling the recovery.”

An inflation-adjusted gauge for the nation’s wages fell in December to the lowest level since 1990, according to labor ministry data, while consumer confidence fell to a level last seen when Abe took office in December 2012. Households will be hit further in April when the first of two planned increases in the consumption tax takes effect.

People need to feel real wage gains for deflation to end, Deputy Prime Minister Taro Aso said last week. Policymakers will monitor economic data for the second and third quarters to decide on the second increase in the sales tax to 10 percent in 2015 from 8 percent, he said.

Gross domestic product will probably shrink an annualized 3.9 percent in the second quarter, the sharpest contraction in three years, according to economists surveyed by Bloomberg.

“The yen’s weakness is unlikely to last long, and a policy that relies on such an unsustainable phenomenon is questionable,” said Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities Co., another primary dealer. “Inflation doesn’t mean a better economy. Wages won’t rise enough to offset higher prices.”

Abe’s drive to spur growth through a weaker yen is putting luxuries out of reach for more Japanese. ANA, the nation’s biggest airline, said Feb. 7 it will raise its fuel surcharge starting April 1, citing a “significant” effect from yen weakness.

Ice cream maker Haagen-Dazs announced last month it will charge more for some items due to higher production costs, while Apple Inc. raised prices for its computers last year.

Bank of Japan Policy Board member Sayuri Shirai suggested the central bank could broaden its 2 percent inflation target into a numerical range once price gains exceed at least 1 percent in a stable manner, according to the text of a speech given in New York and published Saturday on the BOJ’s website.

“A numerical range is like an excuse to prevent the BOJ being blamed for being a ‘liar’ and losing its credibility,” Kazuto Doi, a Tokyo-based portfolio manager at Western Asset Management Co., said Sunday. “Should the BOJ adopt a numerical range now, the market will question its commitment. That will impair their policy aim as a whole in the short-term and can stoke market volatility and a rise in yields.”

Japan’s inflation-linked notes returned 0.7 percent in February, a sixth month of gains, for the longest winning streak since the 10 months ended June 2012, according to data compiled by Barclays. That compares with a 0.5 percent return for inflation-indexed debt in the United States.

“The currency plays a big role in linkers’ performance, so given the risks to the Japanese economy going forward, they certainly don’t look cheap,” said SMBC Nikko’s Noji.

The yen has strengthened against all of its 16 major peers this year, climbing 3.8 percent against the dollar amid concerns in emerging markets and escalating turmoil in Ukraine. It may advance to the higher end of an 80 to 85 range to the dollar this year, Tokai Tokyo’s Sano forecast. The benchmark 10-year note yield may reach 0.25 percent, he said. It fell to 0.575 percent Monday, the least since May 7 and the lowest globally.

Abe’s handpicked BOJ governor, Haruhiko Kuroda, introduced an unprecedented stimulus program in April, helping to push down the yen by the most in three decades last year, boosting Japanese stocks to outperform its major peers.

“The currency and stock markets may dance to Kuroda’s tune,” said Tomohiro Miyasaka, the director for fixed income strategy in Credit Suisse Group AG. “But that’s certainly not the case in the fixed income space. Japan’s bond market is jaded.”