Yen floor at 105 to the dollar: 'Mr. Yen'
The Japanese currency's fall against the US dollar is likely to continue but will be limited, Eisuke Sakakibara tells Emerging Markets
The yen has not entered a free fall situation now that it has broken through option barriers to plunge below 100 to the dollar, Japan's former "Mr Yen," Eisuke Sakakibara, said in an interview.
The Japanese currency will probably turn around at about 105 and retrace some of its fall, Sakakibara said.
"There's momentum for further depreciation of the yen for some time," Sakakibara told Emerging Markets. "So, I wouldn't be surprised to see the dollar at 105 to the yen or even breaking 105. But further depreciation toward 110 or 120 is unlikely because the Japanese economy in relative terms is quite strong."
The one-time vice finance minister for international affairs of Japan also supported the view, expressed recently to Emerging Markets by Bank of Japan governor Haruhiko Kuroda, that the BoJ's massive monetary easing is unlikely to contribute to asset bubbles in emerging markets.
The yen paused in its downward trajectory at the start of this week after breaking through the 100 to the dollar barrier, and sliding sharply against other leading currencies. But this was seen as a temporary respite and dealers predicted the yen would fall further.
"I continue to expect the dollar/yen rate to reach 105 by the end of this year, although it may see a correction around summer," former Bank of Japan foreign exchange trader and now chief foreign exchange strategist at JP Morgan Chase Bank in Tokyo Tohru Saasaki told Emerging Markets.
Sakakibara took a somewhat different view. "I think the yen will probably turn around from about 105 and then recover to above that level," he said. "My prediction for the next six months is that the yen will probably stay in the range of 95 to 105 hovering at around 100."
There is no reason to sell the yen in the mood of 'selling Japan,' he suggested.
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"In that kind of situation, continued depreciation of the [Japanese] currency is not likely." The yen has depreciated against the dollar by "as much as 25% in the last six months," Sakakibara noted. But "that will not go to 40% or 50% 25% perhaps, or at the most 30%."
Japan's economy delivered a pleasant surprise to markets on Thursday. GDP expanded by 0.9% in the first quarter from the previous one, versus expectations of 0.7% in a Reuters poll of economists. On an annualized basis, GDP advanced by 3.5% against expectations of just 2.8%.
As things stand, the dollar-yen exchange rate has simply moved back to where it was when the US began its series of quantitative easing moves several years ago, Sakakibara argued. "It just means that Japan has more or less matched the US in terms of QE."
The BoJ's dramatic monetary easing "has been incorporated into market expectations and Mr Kuroda had predicted monetary policy for the next two years," said Sakakibara. "So, unless there is any significant change to that policy no further substantial move in the currency markets is likely."
He dismissed the idea that Japan's G7 partners might draw a line in the sand beyond which the yen should not be allowed to fall. The US, Europe and others are similarly engaged in monetary easing but they, like Japan, are not "targeting" their exchange rates, he said.
He defended these general monetary easing strategies, which some have described as currency wars or a "race to the bottom."
"The world is now in the process of economic recovery and to have easy monetary policy [at this time] is only natural. They are competitive [moves] but they need to do that. As long as Mr Kuroda and others can explain that it is to stimulate the economy no-one can object."
JGBs ARE SAFE
As for the feared sudden inflow of Japanese and other advanced economy excess liquidity into emerging markets, Sakakibara said that all the evidence so far pointed to money "flowing out of emerging markets and into [US and other] advanced markets" in search of safety and yield.
But while the BoJ's $1.4 trillion monetary easing package launched on April 4 may not be creating waves in emerging markets, it has created considerable turbulence in the Japanese Government Bond (JGB) market, where yields on the benchmark 10-year JGB have jumped from a low of around 0.2% to nearer 0.8%.
Sakakibara was relatively sanguine. "Since Kuroda's policy has been quite aggressive and somewhat sudden, bond traders were surprised at least in the short run and the market has become volatile, "he said."But they will get used to it and the market will settle down [and] the long term rate may again go down toward 0.6% or 0.5%."
The yen's plunge has meanwhile prompted speculation that some major Japanese manufacturing companies might now consider moving at least part of their overseas production back home from other parts of Asia and elsewhere; but Sakakibara rejected this idea.
"Companies take a long-term view," he said." They don't move production sites depending upon fluctuation of exchange rates. I don't think that Toyota, for example, would bring production back from China to Japan. They might move from China to India, Bangladesh or Vietnam but not back to Japan."
Formerly Japan's chief financial diplomat (and mentor to Kuroda during their days together at the Japanese finance ministry) Sakakibara is now actively back on the lecture circuit in Asia and elsewhere.
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