In dogged pursuit of a weaker yen

August 9, 2016

A construction worker stands in front of an electronic board displaying a graph showing the movement of Japanese Yen's exchange rate against the U.S. dollar in the past year outside a brokerage in Tokyo February 22, 2011. Moody's Investors Service warned on Tuesday that it may cut Japan's sovereign rating if government policies fall short of comprehensive tax reform needed to bring ballooning public debt under control. The ratings agency said Japan, where the fifth prime minister since 2006 is facing mounting pressure to quit, needed stability at the top if it was to enact effective fiscal reform.   REUTERS/Kim Kyung-Hoon  (JAPAN - Tags: BUSINESS IMAGES OF THE DAY) - RTR2IXHQ

Just seven banks participating in Reuters foreign exchange polls so far this year have consistently made forecasts for a steady or stronger yen, a traditional safe haven currency, putting them ahead of the pack.

That leaves the remaining roughly 50 banks doggedly clinging to the view that the yen will weaken, getting it consistently wrong.

There is only one other major currency pair Reuters surveys where vast swathes of forecasters have stuck to a view that clearly didn’t work out for such a long period of time: the euro.

Early last year, about 20 major banks predicted the single European currency would breach parity against the dollar sometime over the coming year – a call that never materialised, forcing all but three forecasters to sweep those views back under the rug.

On sterling, forecasters as a whole were remarkably accurate when polled before Britain’s vote to leave the European Union on the likely near-term outcome: that it would fall about 10 percent.

Not so for the yen.

Once again, after finally catching up to the near 16 percent rally against the dollar this year in the prior month, the August Reuters Poll consensus puts the yen down about 7 percent in the next 12 months at 107.7. The range of stretches across a canyon, from 125 to 92.

JPY forecast range

A spectacular amount of both monetary and fiscal measures over the past several years since Prime Minister Shinzo Abe first came into power, while sometimes effective in short bouts, on the whole still have not been enough to materially weaken the yen. In some cases, like when the Bank of Japan introduced a negative deposit rate early this year by surprise in a hotly-contested decision, the measures have done the exact opposite.

A strong yen has side effects Japanese policymakers don’t want. It makes exports, on which the third biggest economy in the world relies so heavily, relatively more expensive on world markets. And it tamps down inflation on imported goods in a country that consumes a lot brought in from abroad.

John Higgins at consultancy Capital Economics writes:

Of course, exchange rates are determined by more than expectations for monetary policy. And there are other reasons to doubt that the yen will fall sharply, such as Japan’s current account surplus. Yet it is hard to see how the country’s problems of slow growth and high public debt can be solved without a much more competitive currency.

The trouble is most commentators are now admitting that the Bank of Japan – which is buying nearly everything it can get away with buying in vast quantities but with no discernible impact at all on inflation of anything other than asset prices – has nearly run out of policy road.

That means a weakening yen would have to be based on the view that something dramatic other than domestic policy could drive it.

Where such a force would come from is not immediately clear, given that the vast majority of the same currency forecasters see at best a modest appreciation in the dollar from here after it racked up a 20 percent rise over the prior two years.

If anything, a powerful international force driving the yen would, as ever, most likely be a temporary or sustained rush to safe havens, and so would be more likely to knock dollar/yen out of its recent trading range to below 100, rather than the other direction.

That is the path of least resistance in markets. It’s much easier to come up with things that would make the yen rally than those that could make it fall. And yet the most aggressive forecasts from FX strategists are still for a weaker yen.

Given how long this has been going on, it may be that the minute they all come around to the idea the yen is going to stay strong is the very moment it starts to crack.

— Analysis by Hari Kishan and Sumanta Dey

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