Business / Financial Markets

Yen rally on Kuroda comments may be fleeting, analysts say

by Andrea Wong

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda’s suggestion that further yen weakness is “unlikely” prompted the currency’s biggest rally this year. Firms from Standard Chartered PLC to Bank of Tokyo-Mitsubishi UFJ Ltd. do not expect the gains to last.

The yen jumped 1.4 percent against the dollar on Wednesday after Kuroda’s comments, accelerating a rebound from a 13-year low reached last week. The yen is the only major currency for which options show traders must pay a premium to protect against gains versus the greenback next month.

Strategists say this bullishness will prove short-lived as the BOJ keeps expanding the supply of yen into the economy to boost the nation’s zero percent inflation rate. Kuroda is the most prominent official to enter the war of words waged in recent weeks against what the authorities see as volatile yen moves that may harm the economy.

“We don’t think this is a turning point for the yen,” said Eimear Daly, a currency strategist in London at Standard Chartered, which gets more than half its revenue from Asia. “Policymakers in Japan still want the weaker yen as a means to achieve their inflation targets. We see the yen going back to its earlier trend.”

Standard Chartered predicted the currency will weaken to 132 per dollar by year-end.

For the first time in almost two months, traders are paying more for one-month options to buy the yen than for those allowing for sales, according to risk-reversal prices compiled by Bloomberg. Contracts from six months onward are still skewed to yen puts, meaning costs to protect against the yen’s decline remain more expensive on a longer-term basis.

Bank of Tokyo-Mitsubishi, Japan’s biggest lender, projected the yen to be little changed by December, with the gains made earlier this week fizzling out. It predicted a level of ¥124 per dollar by year-end, one stronger than the median estimate in a Bloomberg survey of strategists.

“Everyone was troubled with the recent plunge in the yen to the 125-level, so Kuroda’s comments became a welcome rain in the drought,” said Daisaku Ueno, chief currency strategist at the bank’s Mitsubishi UFJ Morgan Stanley Securities Co. unit in Tokyo. “But so long as the BOJ sticks to its easing stance, it’s hard to see the yen continuing to rise.”

Kuroda focused his remarks on a trade-weighted, inflation- protected measure of the currency, telling lawmakers “the yen is unlikely to weaken further in real effective terms” given “how far it has come.” A Barclays PLC gauge of the yen’s weighted value has slumped almost 30 percent since Prime Minister Shinzo Abe took office in December 2012, to the weakest level since 1985.

Morgan Stanley reacted to Kuroda’s comments by reducing its recommended long dollar-yen positions, or bets the yen will weaken.

Strategists including London-based Ian Stannard wrote in a note Wednesday that currencies are becoming “increasingly sensitive to the perception of verbal intervention from global policy makers.” Even so, he reiterated Morgan Stanley’s longer-term view that the dollar will strengthen versus the yen.

While the BOJ refrained from stepping up stimulus in May, most economists in a Bloomberg survey last month expected the central bank to ease policy further by boosting bond purchases by October.

The Federal Reserve’s plan to raise U.S. interest rates will cause the yen to weaken, according to Capital Economics Ltd. The consultancy is more bearish on the yen than most, forecasting a drop to 130 per dollar by year-end and 140 by December 2016.

“The yen will come under renewed pressure, regardless of concepts of fair value or statements from central bankers,” said Julian Jessop, its chief global economist in London. “It is hard to see any solution to Japan’s economic and fiscal problems that does not include a further boost from a weaker yen.”

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