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Yen's stealthy depreciation disguised by resilience versus dollar

by Hiroko Komiya and Chikako Mogi

Bloomberg

Don’t be fooled by the yen’s recent resilience against the dollar — it’s dropping against the rest of its major peers at the fastest pace in six months.

Japan’s currency slumped 3.3 percent over the past four weeks against a basket of nine developed-nation counterparts even as it traded in a range of just ¥2 around 120 per dollar. It dropped the most against the pound, which was supported by the U.K. election result, and Norway’s krone, which is rising in line with oil.

The yen’s weakness over the past two years came as the Bank of Japan pursued policies including unprecedented bond purchases, seeking to revive an economy that has spent more than a decade battling deflation and a strong currency.

While the currency has stalled versus the dollar as traders pushed back their outlook for a much-awaited U.S. interest-rate hike, most analysts predict the yen will head lower against the greenback, too, once the stasis breaks as BOJ stimulus sends cash overseas.

“The pressure on the yen from the BOJ’s monetary easing is showing up across currencies, wherever traders can see chances to make gains,” said Daisaku Ueno, chief currency strategist at MUFJ Morgan Stanley in Tokyo. “Meanwhile, the yen can’t remain static against the dollar forever and stalemates like this are usually followed by a big move.”

A gauge of Japan’s currency versus its Group of 10 peers has dropped 5 percent from this year’s high set on April 14, the biggest four-week decline since November, according to Bloomberg Correlation-Weighted Indexes.

The yen has weakened 4.6 percent in the past month against the euro and 5.1 percent against the pound in the same period.

It’s lost about 40 percent of its value against the greenback in the past few years, falling to a 7½-year low of 122.03 per dollar on March 10. It reached 121.07 on Thursday.

The yen’s losses are helping to bolster exports, spurring the nation’s strongest trade surplus in four years and better-than-expected economic growth. Gross domestic product grew at an annualized 2.4 percent in the first quarter, up from 1.1 percent in the previous three months, the Cabinet Office said Wednesday.

Japan shipped 18.7 percent of its total exports to the U.S. last year, the largest percentage since 2007, based on Finance Ministry data.

Even with those signs of improvement, there’s little prospect the BOJ will wind down its ¥80 trillion ($661 billion) of annual stimulus anytime soon. Policymakers cut their inflation forecast for the current fiscal year to 0.8 percent on April 30 and pushed back an estimate of when they’ll achieve their 2 percent target to between April and September 2016, from an earlier prediction of around March.

“Expectations for an imminent BOJ easing have diminished but those for prolonged monetary easing are growing,” MUFJ Morgan Stanley’s Ueno said.

While the yen may remain in a narrow band versus the greenback for now, once a Fed rate increase becomes more certain, the yen will weaken toward 125 per dollar, he forecast.

Japan’s currency stayed in a range of just ¥2.34 in April, the narrowest since July. A monthly gap tighter than ¥2.5 signals prolonged trading in a narrow band for several months, similar to what happened between January and August last year, Ueno said. Credit Agricole SA also expects the range-trading to continue.

The pause in the yen’s decline against the dollar comes as some Japanese officials question whether the currency has already fallen too far, citing concern about higher import costs and lower real household incomes. BOJ Gov. Haruhiko Kuroda told the Diet this month that the excessive yen strength of the past has been corrected.

“There’s limited scope for the yen to fall significantly further against the dollar,” said Nicholas Spiro, managing director in London of Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC. “Yet the depreciation trend has shifted to other crosses, in particular the pound where the monetary divergence theme is the starkest.”

The yen will weaken to 125 per dollar by the end of this year, according to the median estimate of more than 50 analysts surveyed by Bloomberg.

Japanese investors are increasing their holdings of overseas assets to seek higher returns, putting pressure on the yen to weaken against a range of currencies.

Their purchases of investments including stocks and bonds in Canada and the euro area both turned positive in March compared to the month a year earlier, while net buying increased in Australia, according to the Finance Ministry.

Japan Post Bank and the postal-insurance arm of state-owned Japan Post Holdings Co. held 12 percent of their combined portfolio in overseas securities last fiscal year, up from 8.3 percent the year before.

“Even without an additional BOJ easing, the yen will still weaken this year, led by investment outflows,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

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