The yen has never fallen for four straight years against the dollar, and Japan’s former top currency official sees better than 50 percent odds that its currency will halt the losing streak.
While the weak-yen trend from 2012 is still intact, the gap between actual currency levels and purchasing power parity has stopped widening, said Toyoo Gyohten, who was vice minister for international affairs at the Finance Ministry from 1986 to 1989.
The yen fell 12 percent in 2014 to log its a third annual loss, the longest streak since 1997.
“It’s becoming unlikely that the yen would extend a sharp decline against the dollar this year in the same manner as seen last year,” Gyohten, 84, who is now the president of the Tokyo-based Institute for International Monetary Affairs, said in an interview Wednesday. “If you ask me if 2015 will be a year for the yen weakness to be sustained, the probability is less than 50 percent.”
The yen is the top performer this year among 16 major currencies tracked by Bloomberg as plunging oil and stock prices around the world increase demand for haven assets. The median estimate of economists and strategists in a Bloomberg survey is for the yen to end at 125 this year. On Friday morning it was trading at a little more than 116 in Tokyo.
Markets had gotten ahead of themselves in selling the yen to a seven-year low of 121.85 in December after the Bank of Japan expanded its monetary stimulus in October, Gyohten said. Market expectations for the Federal Reserve to start raising interest rates later in 2015 also fueled the declines, he added.
“Such moves will be corrected over time,” he said. “Recent development suggests the yen weakness has settled down.”
The yen has depreciated more than 30 percent in the past two years as Prime Minister Shinzo Abe implemented his so-called three arrows of economic policy — monetary easing, fiscal spending and vows of structural reform — to revive growth.
The dollar hasn’t lost its strength against the yen as Japan struggles to achieve a 2 percent inflation target amid global deflationary pressures, Gyohten said. A divergence in monetary policies between Japan and the U.S. will also support the trend of a stronger dollar, he said.
“It’s not possible for Japan to see 2 percent inflation in 2015, but that doesn’t mean ‘Abenomics’ has failed,” he said. “Japan won’t stand out even if it can’t achieve the target as 2 percent doesn’t now look to be a global standard.”
As 2015 marks the 30th anniversary of the Plaza Accord, Gyohten, who participated in the discussions in 1985, said there is no global cooperation scheme for currencies now.
The Dollar Index, which tracks the U.S. currency versus six major peers, peaked in 1985 before finance ministers from the world’s largest economies forged the Plaza Accord, agreeing to weaken it to reduce a record U.S. current account deficit, the broadest measure of trade because it includes investment. After the agreement, the yen appreciated to around 150 per dollar in third quarter 1986, from about 250 a year earlier.
“The big difference now from then is that the comprehensive nature of a country’s power that is reflected in a currency has changed entirely,” Gyohten said. “There is a fundamental paradigm shift in sharing awareness of global issues or a drive to resolve them today.”