Wall Street and Japan’s largest banks are starting to see a similar outlook for the yen, saying its advance could break the barrier of ¥100 to the dollar next year.
JPMorgan Chase & Co., Goldman Sachs Group Inc and BNP Paribas SA are all forecasting that the yen will hit the century mark for the first time in four years in 2021. Rarer still, domestic giants Mizuho Bank Ltd. and MUFG Bank Ltd. are joining them, with estimates that the yen could even push to ¥98, a level unseen since 2013.
The yen at ¥100 to the dollar is a tough call for Japan’s banks, mainly because it’s the point where domestic exporters start losing money. Now the greenback’s weakening trend is closing a traditional gap between local and global perspectives on the yen.
"The perception gap has been in place for years,” said Hiroshi Yokotani, portfolio strategist for fixed income and currencies at State Street Global Advisors in Tokyo. "Compared to past years, more Japanese seem to be forecasting the dollar weakness and yen appreciation to progress a bit further next year.”
The bullish yen forecasts owe largely to a bleak consensus on the dollar. The world’s reserve currency is at multiyear lows against major peers. It’s lost 4% versus the yen this year, and 2021 could mark a sixth-straight year of underperformance — the longest losing streak since Japan introduced the floating-rate system in 1973.
Investors are now heavily shorting the dollar, which raises the risk of a messy unwind should vaccine distribution spur a faster-than expected U.S. recovery. David Forrester, a foreign-exchange strategist at Credit Agricole CIB in Hong Kong, sees the yen testing ¥100 only briefly at best, as he expects "the U.S.’s rebound to be modestly better than Japan’s.”
It’s a widely shared view, however, that the dollar’s weakening trend is entrenched. America’s "widening current account deficit, low yields and huge monetary base” due to the Federal Reserve’s unprecedented bond purchases, is the driver, says Minori Uchida, head of global market research at MUFG Bank in Tokyo. Last year he saw the yen finishing 2020 at ¥104, slightly weaker than Friday’s level of ¥103.11 per dollar.
The U.S. current account gap grew in the second quarter to the largest since 2008, while Japan’s surplus is expanding. And the U.S. 10-year yield is stuck below 1%, even as inflation expectations have climbed.
The greater scope for central bank easing in the U.S. relative to Japan also weighs on the dollar, as it means U.S. real yields — bond yields adjusted for inflation — could fall even further below zero. Real yields are higher in Japan, where the central bank’s options look all but exhausted after cycling through quantitative easing, negative rates and yield curve control.
Against this backdrop, which has seen investors pile into rising U.S. stocks, the dollar looks overvalued, according to Osamu Takashima, chief currency strategist at Citigroup Global Markets Japan Inc. He sees the yen rallying past ¥100, within reach of ¥95.
The yen approaching the ¥100 mark would certainly catch policymakers’ eyes, given the risk to exporters’ profits as the economy struggles to recover from the pandemic. A Cabinet Office survey in March showed the break-even exchange rate for listed export firms in fiscal 2019 was ¥100.20.
"It’s possible for the yen to hit ¥100 against a weaker dollar but Japanese authorities will do all they can to prevent that,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo. Between the central bank and Foreign Ministry, there are plenty of options to rein back the currency, he said.
Japan last intervened in November 2011 to fend off speculative buying that pushed the yen toward ¥75. Intervention hurdles have risen globally since then.
Some of the traditional bulwarks against yen appreciation may be eroding. One of the ways the Bank of Japan’s policy has suppressed the yen is by driving domestic yields so low that investors are motivated to look for better returns abroad. These investment outflows may not hold up, particularly as local yields edge higher on record-breaking government issuance.
"There will be outbound flows including demand for direct investment overseas and others that will restrain the pace of yen appreciation, but its braking impact is weakening,” said MUFG’s Uchida.
Another traditional check on the yen’s strength is importers and institutional investors waiting to buy the dollar on dips. These buyers may have ratcheted their key entry point down to ¥100 since breaking the ¥104 level that’s held more or less consistently for the last four years, Uchida said.
Moreover, some now consider the yen undervalued based on purchasing power parity after years of pressure from aggressive central bank policy.
"The yen’s fair value is theoretically around ¥100 or even slightly beyond that,” said State Street’s Yokotani. "Strength in the U.S. economy and Japan’s years of monetary easing have prevented adjustments, but the yen’s advance may pick up a bit next year given the state of the U.S. and its monetary policy stance.”
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