As the global economic recovery from the coronavirus accelerates, Japan appears to be standing still as its currency retreats.
The yen has already fallen nearly 6% against the dollar this year, the worst performance among the Group of 10 currencies, as global markets brace for an interest rate hike almost everywhere except Japan.
A return to normal for most countries will mean growth and a return to extreme monetary parameters. In Japan, however, deflation and crisis situations were already the norm and will continue to be. As the gap with the outside world widens again, Japanese investors are expected to expand their search for returns overseas as companies look to expand into overseas mergers and acquisitions, increasing the pressure on the currency.
“Last year has been a bit of an anomaly and we are now back to normal programming,” said Mark Grant, chief global strategist at B Riley Securities Inc., who expects the yen to fall further. against the euro and the dollar. “Japan is stuck. It just doesn’t react economically as quickly as the United States or Europe to overcome the pandemic.
Tokyo strategists note that the weakness of the yen is more apparent now against the currencies of resource exporters like Canada, Norway, Australia and New Zealand. They expect this to continue until the dollar strengthens later this year and exerts its dominance over the yen.
“Japan has a fundamental problem of low inflation and lack of price hike expectations that will not be resolved anytime soon,” said Yujiro Goto, head of currency strategy at Nomura Holdings Inc. “This will continue to grow. put downward pressure on the yen next year, ”said Goto, who sees the yen weakening to 112 per dollar this year and to 115 by the end of 2022. It has been listed around from 109.25 in Tokyo on Tuesday.
The country’s basic consumer prices have been negative since August last year and Bank of Japan Governor Haruhiko Kuroda said in a recent interview that the BOJ will persist with its ultra-easy policy which pinpoints 10-year yields near 0%.
In contrast, Federal Reserve officials said they could start discussing options for future shrinkage at future meetings. The Bank of Canada has started cutting bond purchases, Norway’s central bank is on track to raise interest rates this year, and Reserve Bank of New Zealand projections indicate it may follow suit in 2022.
Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co., expects investors to continue to favor the pound and the Canadian and New Zealand dollars over the yen. Declines against the loonie are already over 10% this year.
While opinions on which currencies will remain strongest against the yen vary, expectations of broad downward pressure on the currency are also visible in investor positioning. Hedge fund bets on the decline of the yen are around the highest levels since early 2019 and asset managers’ bets on the currency rise are near their lowest since March 2020.
Money flows from mergers and acquisitions add to the weaker yen, said Shusuke Yamada, head of Japan’s foreign exchange and rate strategy at Bank of America in Tokyo.
Foreign direct investment, including mergers and acquisitions, rose nearly 30% in the first quarter compared to a year ago, as the Japanese economy contracted, according to government data.
Certainly, not everyone expects the currency to continue to decline. The median of projections compiled by Bloomberg is for the dollar-yen at 109 in the last quarter of this year.
And the acceleration of Japan’s vaccination campaign is seen as potentially beneficial for the country stock market, which could pour in to help the currency.
Yet for many analysts and investors, the expected widening gap between Japan’s monetary policy and its peers is weighing heavily on the currency outlook.
“There is no need to worry about rising Japanese yields, so markets are looking for a pair they can sell the yen against,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “The yen is a currency that is hard to buy, barring unexpected risk or direct investment inward.
– With the help of Paul Jackson and Ruth Carson