Bank of Japan Governor Masaaki Shirakawa’s inflation goal is succeeding where record intervention failed, as the yen heads for its steepest monthly drop in two years.
The currency reached an almost nine-month low after the BoJ, which has struggled for more than a decade against deflation, said on Feb. 14 it aimed for 1 percent annual gains in consumer prices and would add ¥10 trillion ($123 billion) to the economy. Traders are paying record premiums for options to buy the dollar versus the yen for three, six and 12 months. Bullish bets on Japan’s currency have fallen 70 percent from the end of last month.
Shirakawa needs a weaker yen to help Japan export its way out of a recession made deeper by last year’s earthquake and the worst nuclear crisis in a generation. Energy imports to replace lost capacity have reversed trade surpluses that made the currency a refuge in a slowing global economy. Prospects of higher inflation are driving it down, at least for now.
“The BoJ seems to have shifted their stance quite aggressively,” Mansoor Mohi-uddin, the Singapore-based chief currency strategist at UBS AG, said by telephone on Feb. 24. “It’s definitely a situation where the trend is now reversed.”
UBS cut its year-end yen projection to 85 per dollar from 80, saying the BoJ’s inflation goal will help reinforce expectations that policy will remain easier for longer, a note from the brokerage said on Feb. 22.
Japan has posted an annual current-account surplus, the broadest measure of trade, since at least 1985, according to the Ministry of Finance, turning the nation into the world’s largest creditor. It had 251.5 trillion yen in net assets overseas at the end of 2010, the latest data from the ministry show. That’s almost the size of Germany’s annual economic output in dollar terms.
The Trade Ministry said in November that the current account may slide into deficit from the middle of this decade, and Japan posted a record 1.48 trillion-yen trade deficit, a narrower measure, last month.
Through the global financial crisis, the currency gained from more than 120 to the dollar in 2007 to about 80 as Japanese households accumulated 1,471 trillion yen in assets, helping the government finance its deficits. Domestic investors hold more than 90 per cent of Japan’s public debt, the world’s largest at about double the size of the economy, allowing the government to borrow for 10 years at less than 1 per cent interest.
The currency climbed against all 16 most-traded counterparts in 2011 for a second-straight year. Even after the recent decline, the yen is 17 per cent stronger than its five-year average. It will be at 77 by the end of March, according to the median estimate of currency analysts surveyed by Bloomberg.
“As long as Japan maintains its current-account surplus, funds will accumulate inside the country and be invested in government bonds via bank deposits,” Yunosuke Ikeda, head of Japan foreign-exchange research at Nomura Securities Co., the nation’s biggest brokerage, said by phone on Feb. 23. “A plunge in the yen is intriguing as a tale, but I am skeptical that it will actually come about.”
The yen slid against the dollar for five-consecutive days through Feb. 22, the longest stretch since April, and is set for a 6 percent plunge in February, the biggest monthly drop since December 2009. It reached 81.67 against the dollar today, the weakest level since May, before trading at 81.09 at 11:09 am in Tokyo. The yen slid to 109.93 per euro, the least since October.
Government currency sales totaled 14.3 trillion yen last year, the third-biggest annual sum on record, Ministry of Finance data show. That didn’t stop the yen from rising to 76.03 per dollar this month before the BOJ’s shift, less than 1 per cent off its record of 75.35 reached on Oct. 31.
Combined with regular purchases and earlier stimulus measures, the BoJ will acquire 32.7 trillion yen in Japanese government debt this year, compared with the government’s planned issuance of 149.7 trillion yen for the 12 months starting April 1. Yields on Japan’s two-year bonds slid to 0.1 per cent on Feb. 16, the lowest since October 2010.
“The shift toward inflation targeting as well as the announcement to buy further JGBs is quite significant,” Frederic Neumann, the Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc., said by phone on Feb. 22. The yen may extend declines this year to 84 per dollar, he said.