Bloomberg News

Yen’s Worst Slump Since 2009 Shows Intervention No Match for BOJ Purchases

February 27, 2012

The yen plunged to a seven-month low after the Bank of Japan, 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 yen ($123 billion) to the
economy. Photographer: Tomohiro Ohsumi/Bloomberg

The yen plunged to a seven-month low after the Bank of Japan, 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 yen ($123 billion) to the economy. Photographer: Tomohiro Ohsumi/Bloomberg

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 yen ($124 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.

Current Account

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 percent 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 percent interest.

Five-Day Slide

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 percent 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 5.3 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 appreciating 0.7 percent to 80.55 at 8:37 a.m. New York time. The yen slid to 109.93 per euro, the least since October, before strengthening 1.2 percent to 107.84.

Two-Year Yields

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 percent 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 percent 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.

Inflation Target

Japan’s consumer prices, excluding fresh food, fell 0.1 percent in December. They’ve declined an average 0.2 percent for the past 10 years, and the rate hasn’t been above 1 percent for more than 12 months since 1993. The central bank forecast in October the so-called core inflation rate will rise 0.1 percent in the year starting April, followed by a 0.5 percent gain the next fiscal year.

Finance Minister Jun Azumi said the BOJ effectively established an inflation target when it set a “goal” of 1 percent inflation on Feb. 14, replacing earlier wording that the central bank had an “ understanding” of where consumer prices should go.

“I can feel their seriousness,” Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co., said on Feb. 22 by phone, referring to the inflation goal. Before the change, “markets sensed the BOJ eschewed commitment to consumer prices.”

Negative Bets

Traders are giving in. The risk-reversal rate for three- month options on the dollar against the yen reached 0.53 on Feb. 20, the highest closing level in data compiled by Bloomberg going back to October 2003. It was as low as negative 2.49 in August. The six-month rate was at 0.25 today, while the one-year rate traded at 0.05.

A higher number for the difference in volatility between call and put options indicates there is more demand from bulls than bears.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop slid to 17,257 on Feb. 21, figures from the Washington-based Commodity Futures Trading Commission showed. It reached 59,657 on Jan. 13, the most since March 2008.

Efforts to spur the Japanese economy with asset purchases pale next to those in the U.S. and Europe. The Federal Reserve (FARBAST)’s total assets have more than doubled since the beginning of the fourth quarter in 2008 as it started so-called quantitative easing by purchasing debt. The European Central Bank (EBBSTOTA) boosted its assets by 75 percent during the period, while the BOJ’s (BJACTOTL) balance sheet increased 25 percent, before the announced purchase plan.

BOJ Divergence

“BOJ policy is diverging from what we see in Europe and the U.S.,” Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG, said by phone on Feb. 22. “Expectations for further easing are diminishing in Europe, while economic indicators point to decreasing likelihood of additional easing in the U.S.”

A stronger yen hurts the overseas competitiveness of exporters and cuts the value of income earned abroad when repatriated. A previous yen record of 79.75 reached in April 1995 stood until March last year when a magnitude-9.0 earthquake struck Japan’s northeast, stoking speculation companies would bring home assets to pay for rebuilding. The currency jumped to 76.25 on March 17, prompting coordinated intervention by Group of Seven nations the next day.

Record Deficit

Companies listed on the Topix Index had a 69 percent drop in net income in the last reported quarter, according to data compiled by Bloomberg. Mazda Motor Corp., the Japanese carmaker most dependent on exports, predicted its biggest annual loss in 11 years. Television maker Panasonic Corp. forecast a record 780 billion yen loss this fiscal year.

Japan posted a record trade deficit in January, official data showed on Feb. 20, with imports of liquefied natural gas surging 74 percent from a year earlier. Energy costs have swollen as nuclear plants were shuttered following meltdowns and radiation leaks at Tokyo Electric Power Co.’s quake and tsunami- damaged Fukushima plant.

“People took it for granted that Japan would always have a trade surplus, but they may be starting to realize that is not the case,” Takatoshi Kato, a former top currency official for Japan, said in an interview on Feb. 23.

The economy has contracted in three of the past four quarters, and a November report from the Trade Ministry said the current account may slide into deficit from the middle of this decade,

A shrinking current-account surplus is leading to a “reevaluation of the fundamentals in Japan,” Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney, said by phone by Feb. 23. “The fiscal situation has deteriorated, and there’s certainly concern about a hollowing out of the Japanese economy.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Hiroko Komiya in 東京 at hkomiya1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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