BOJ may be unable to halt yen's rising tide: traders

by Ron Harui and Stanley White


The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders.

Deutsche Bank AG, UBS AG and Barclays PLC predict the yen will recover from its steepest weekly decline since 1999 as investors reduce carry trades that fund purchases of higher-yielding assets by borrowing in Japan. The currency will appreciate to ¥90 per dollar from ¥98.02 Thursday in Tokyo even if the BOJ intervenes to stem the biggest annual gain since 1998, they said.

“Once the market realizes that we’re now in a global recession, there’s further deleveraging to come,” said Geoff Kendrick, a senior currency strategist in London at UBS, the second-biggest trader in the $3.2 trillion-a-day market. Traders “are capitulating” after five years of bets against the yen, he said in a Nov. 4 interview.

The currency’s 14 percent gain against the dollar this year and 29 percent advance versus the euro prompted the government to announce last month it may buy or sell currencies to influence exchange rates, as the world’s second-largest economy stumbled. Gross domestic product shrank by an annualized 3 percent in the second quarter as exports dropped 2.5 percent, according to government data.

Canon Inc., the world’s largest camera maker, blamed the yen’s rally when the Tokyo-based company cut its forecasts to the first profit decline in nine years last month. Sony Corp., the second-largest maker of consumer electronics, said net income fell 72 percent in the quarter that ended Sept. 30. Tokyo-based Sony gets 77 percent of its revenue outside Japan, according to data compiled by Bloomberg.

The yen’s real effective exchange rate, a measure of its value against 15 of Japan’s trading partners, rose 11.2 percent in October, the biggest gain since the BOJ started the index in 1970.

Finance Minister Shoichi Nakagawa said last month that Japan was prepared to restrain the yen, which would be the first time the government would buy or sell currencies to influence exchange rates in four years. The BOJ, which trades on behalf of the Finance Ministry, sold ¥14.8 trillion in the first quarter of 2004, when it traded as high as ¥103.42 per dollar. The currency still ended the year stronger, at ¥102.63.

“An intervention to change the yen’s rising trend would be like trying to stop a tsunami with one hand tied behind your back,” Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, said in an interview on Oct. 28. The unit of London-based Barclays PLC is the third-largest foreign-exchange trader.

The currency pared its advance in the past eight days as global stocks rallied, reducing pressure on the government to step into the market. The yen traded at 98.02 at 9:34 a.m. in Tokyo Thursday, compared with 90.93 per dollar on Oct. 24, the strongest since 1995.

UBS forecasts the yen will rise to 90 per dollar in a month. Deutsche Bank, the largest trader, predicts that level will be reached this year, while Barclays’ forecast is for six months. The banks are outliers on Wall Street, where the mean estimate for the yen is 99 at yearend, according to a Bloomberg survey.

Carry trades grew during the past five years, driving the yen to 124.13 in June 2007, as central banks increased interest rates to fight inflation while Japan kept its key rate at 0.5 percent. Investors borrowing in the yen could sell the currency and profit by buying assets in Australia, where policymakers raised benchmark borrowing costs as high as 7.25 percent in March from 4.25 percent in 2002.

The strategy lost favor as the financial crisis caused banks and financial companies to report $693 billion in losses and writedowns since the start of 2007 and curbed demand for higher-yielding assets. Slowing economies also hurt the carry trade as central banks lowered interest rates to prompt growth. The Reserve Bank of Australia slashed its rate by 2 percentage points since Sept. 2, and the BOJ cut its rate by 0.20 percentage point last week.

The dollar may drop as low as ¥80 if it penetrates the ¥90 level because Japanese investors are losing appetite for overseas investments and need to hedge bets from the past decade, wrote Masafumi Yamamoto, head of foreign-exchange strategy at Royal Bank of Scotland Group PLC in Tokyo, in an Oct. 27 note to clients.

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