Mr. Yen sees the Japanese currency’s 30 percent slump since 2012 coming to an end.
Eisuke Sakakibara, a former vice finance minister, says the Bank of Japan’s acceptance of the yen’s drop — and the Federal Reserve’s tolerance for dollar strength — are wearing thin. The yen weakened past 125 per greenback for the first time in more than 12 years this week. Sakakibara, 74, said that policy makers are unlikely to allow a decline below 130.
“That isn’t desirable for Japan as it could be damaging to the economy,” Sakakibara, who earned his nickname in the 1990s for his influence over the exchange rate, said in a June 1 interview. “There will be a level where the U.S. won’t tolerate further dollar strength,” either.
The yen’s plunge has been accepted as a depreciation Japan needed under Prime Minister Shinzo Abe’s plan to pull his nation out of a deflationary spiral. The currency dropped to 125.05 on Tuesday, the weakest level since December 2002.
After treading water for the first four months of 2015, the yen tumbled 3.8 percent in May as Fed Chair Janet Yellen expressed willingness to raise interest rates this year. The dollar has climbed 17 percent versus its peers during the past year. The greenback’s appreciation is hurting growth and may push back the timetable for a tightening of policy, Fed Governor Lael Brainard said Tuesday in Washington.
Monitoring movements
Japanese officials including Chief Cabinet Secretary Yoshihide Suga have also been signaling concern about the pace of the yen’s decline — while stopping short of calling for a halt. BOJ Governor Haruhiko Kuroda told reporters on Tuesday it is desirable for exchange rates to be stable and reflect a nation’s economic fundamentals.
“Looking at the past few days, there are rough moves, in terms of weak yen direction,” Finance Minister Taro Aso said in Dresden, Germany, last week after a Group-of-Seven finance ministers meeting. “We will continue to carefully monitor the movements in the market.”
A breach of 130 may spur Japanese officials to become more aggressive and try and talk the yen back up, potentially by intervening in the market, said Sakakibara, who is now a professor at Aoyama Gakuin University in Tokyo.
“The government isn’t supporting the yen’s weakness but it is passively allowing it,” said Sakakibara, who retired from his role as Japan’s Vice Minister for Finance in 1999 and was succeeded in that post by the current BOJ Governor Kuroda. “It’s a different story if it goes beyond 130.”
Top forecaster
Ebury Partners Ltd., the most-accurate yen forecaster in the past 12 months, according to data compiled by Bloomberg, doesn’t see much chance Japanese officials can stop the currency tumbling past 135.
The BOJ will expand easing again this year, while the dollar will strengthen further once the Fed starts raising rates, Enrique Diaz-Alvarez, chief risk officer at Ebury in New York, said last week.
Ebury, which provides financial services to small and medium-sized companies, forecasts Japan’s currency will slide to 132 by year-end, and then weaken to 138 in 2016, the most bearish projection of more than 50 analysts surveyed by Bloomberg. The median forecast is for the currency to finish the year at 125 and be little changed at 126 by the end of 2016.
U.S. blessing
If the yen weakened to 130, Japan would probably seek the U.S.’s blessing to intervene, most likely verbally, according to Sakakibara. He rose to prominence in August 1995 when he helped engineer a coordinated intervention by the central banks of Japan, the U.S., Germany and Switzerland to weaken the yen after it had climbed to a then-record 79.75 per dollar. He was less successful in halting the yen’s decline beyond 140 in the middle of 1998.
“It will become important to coordinate with the U.S. and think about what kind of action to take,” Sakakibara said.
U.S. Treasury Secretary Jacob Lew, who spoke with Japanese Finance Minister Aso at last week’s G-7 gathering, said countries shouldn’t target exchange rates for competitive purposes.
Japan has not bought or sold its currency to sway the yen’s price since December 2011. On March 18, 2011, a week after a devastating earthquake and tsunami hit northern Japan, the Group of Seven nations undertook coordinated action to counter a jump in the currency.
Given that the yen’s slide already reflects the policy divergence between the BOJ and the Fed — and the potential for intervention if it falls much further — the currency is bottoming out, according to Sakakibara.
“Further yen weakness isn’t likely,” he said.
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