Former Vice Finance Minister Eisuke Sakakibara says that while doubts over the global economy are strengthening the yen the currency probably will not gain enough to hurt Japan’s exporters.
There is a high probability the yen will shift to a range between 110 and 115 per dollar by the second half amid demand for haven assets, said Sakakibara, who was nicknamed “Mr. Yen” when he oversaw currency policy from 1997 to 1999. The yen rose to as high as 116.51 last week for the first time since August amid turmoil in global markets as Chinese growth stutters.
“When there’s uncertainty in the overall global economy, safe currencies like the yen are bought — and there’s a good chance the yen will strengthen further from here,” the 74-year-old, who is currently a professor at Tokyo’s Aoyama Gakuin University, said in a recent interview. “As long as the yen doesn’t break 100, there won’t be a problem. If it’s at 105 or 110, Japanese exporters are still highly competitive.”
Prime Minister Shinzo Abe’s program of stimulus aimed at ending decades of deflation helped push the yen from around 80 per dollar at the end of 2012 to as weak as 125.86 last year for the first time since 2002. This year, it has strengthened against all its major peers as the nation’s stocks had their worst start to a year ever, prompting JPMorgan Chase & Co. to bring forward its forecast for additional Bank of Japan easing to April from November, while HSBC Holdings PLC sees an increasing risk of intervention.
Japanese manufacturers assumed ¥118 per dollar for their business plans on average in the six months through March, according to the BOJ’s Tankan survey conducted last month before gains accelerated. A stronger yen could threaten the wage increases that central bank Gov. Haruhiko Kuroda hopes will spur a virtuous cycle of rising demand boosting prices. He has reiterated in recent days that he stands ready to add stimulus if necessary, even as he says he has no plans to alter policy for now.
Sakakibara’s view clashes with another former Finance Ministry official, Takatoshi Ito, who said yen strength beyond 110 per dollar might be problematic in an interview earlier this month. Ito, who was a deputy to Kuroda when the now-BOJ chief succeeded Sakakibara as vice finance minister in 1999, sees 120 to 125 as “a comfortable range.”
Sakakibara sees the rout in natural resource prices as being at the core of the turmoil in markets, and warns that conditions in China have the potential to worsen. Brent crude, the benchmark for more than half the world’s oil, has slumped below $30 for the first time since 2004.
“There’s still no sign of a bottom, and that’s why the market is so unsettled,” he said. “We cannot rule out the possibility that China will fall into a crisis.”
Sakakibara predicts the BOJ will ease policy “once or twice” toward the end of the year, including an expansion of Japanese government bond and exchange-traded fund buying, in anticipation of a consumption-tax hike scheduled for April 2017. A similar bump in the levy in April 2014 sent the economy into recession.
Japan’s 10-year government bond yield will gradually sink toward zero, he said. It dipped to a record 0.19 percent last Thursday, and was at 0.205 percent at the end of trading Monday in Tokyo.
In a Bloomberg survey of 25 economists following the BOJ’s latest policy meeting last month, 14 respondents predicted no additional easing for the foreseeable future. In another poll earlier the same month, only one of 38 analysts said the central bank would be able to reach stable 2 percent inflation by its target period ending around March 2017. The central bank’s benchmark consumer-price gauge has languished near zero for close to a year.
Sakakibara says the whole idea of a price goal is misguided.
“Japan’s economy is already fully mature, and if you add in the new development of a decline in natural resource prices, then achieving 2 percent inflation is pretty much impossible,” he said. “Inflation of 1 percent is better than 2 percent, and zero is better than 1 percent. There’s no need to try and force it to 2 percent.”