USD/JPY 2015 Preview: Yen's Slump to Continue, Bowing to Abe

[thenews]

Japan's currency will snatch a new record in 2015, most analysts predict, bearing in mind the even starker monetary policy divergence - its already fourth straight yearly depreciation against the greenback would be its longest losing streak on record, or at least since the global monetary system broke from the gold standard in 1971.

There is no reason to believe that the upcoming year will bring relief to the Japanese currency, with a hyperactive Bank of Japan (BoJ) combined with rate hike prospects being the most obvious - although not the only - reason behind the trend.

So, the currency's astonishing slide against the dollar is set to continue, with markets believing that the slide will be bigger in 2015 than it was in 2014. Back then, the yen burned about 13%, less than the almost 19% trashed in 2013 and the 14.50% it gave up in 2012.

Place bets, b*tch

That would even extend the massive total depreciation since the end of 2011 to levels dangerously approaching a whopping 50%, some analysts predicted. While the estimates varied in their figures, virtually no one predicted that the yen would actually appreciate in 2015.

A Bloomberg survey of 50 analysts predicts the currency pair would close the year at ¥125.00 levels, a relatively modest projection.

Nomura - the top forecaster of the yen-dollar exchange rate over the four quarters ended September 30 - sees those levels as well, cooling expectations of a greater downturn, as it points to increasingly speculative behavior as well. “Because of periodic position unwinding by speculative investors, the yen’s decline will be surprisingly slow,” the bank said in a note.

The Bank of Tokyo-Mitsubishi gave a similar outlook, pointing out an often overlooked risk - the dollar's strong appreciation might became unbearable, hampering economic recovery. “As the dollar strengthens, it builds headwinds against further appreciation,” Minori Uchida, the head of global-market research at the bank, told Bloomberg. “While it could overshoot, 130 yen per dollar seems a bridge too far.”

'Just a beginning'

Still, some offered bolder predictions. Takeshi Fujimaki, a banker and former adviser of George Soros, who turned opposition lawmaker, expects a drop to ¥140.00 during 2015.

However, he painted an even more extreme picture, saying that the yen could easily plunge to as low as the ¥200.00 territory, pointing to the island nation's massive sovereign debt mountain.

“Once investors see Japan’s fiscal default through the BoJ’s camouflage, the yen will spiral out of control to 200 per dollar and beyond,” he told Bloomberg in an interview on December 1. “We’re still at the early part of the yen’s large-scale depreciation.”

Supermassive QQE

While a majority of analysts think that such a prognosis might be an exaggeration, they basically agree that all cards will play against the yen even in 2015.

First of all, as mentioned above, the monetary policy divergence will become even stronger once the Fed raises its rates, possibly in the first half of the year. On the contrary, on October 31 the BoJ even extended its already supermassive stimulus, announcing it will buy at least ¥1.25 trillion of debt per month for more than 10 years, up from a minimum target of ¥650 billion. The central bank will continue to purchase between ¥8 trillion and ¥12 trillion of government securities in total each month, it said.

If the bank leaves policy as it is, its total balance sheet will be worth more than half of the total Japanese gross domestic product (GDP) by the end of the next year. By way of comparison, the US Fed ended its QE program in October and left its total balance sheet at approximately 25% of US GDP.

All cards against yen

However, there will be a set of further factors which are expected to push the Japanese currency lower. Namely, the Shinzo Abe government's fiscal excesses - for which he was recently slapped by Moody's in the form of a lowered outlook - are expected to decrease the attractiveness of domestic investment.

Added to that, his 'three-arrow' Abenomics (consisting of accomodative monetary policy, fiscal stimulus and structural reforms) seem to be missing the 'third arrow' - the reforms have been lagging, making a more lasting economic recovery increasingly elusive.

Not to be forgotten, capital outflows from the country - especially pension funds - are expected to continue hunting for higher yields overseas. In these circumstances, Nomura estimates that the island nation's pension funds will send a net ¥12 trillion abroad in fiscal 2015, forming the bulk of a total ¥19.4 trillion yen. UBS Group predicts an even higher number - ¥13.6 trillion.

In the light of this, Fujimaki's projection doesn't seem so extreme anymore, especially as Abe himself desires the weaker yen, though he hasn't publicly admitted it. In fact, Goldman Sachs Asset Management suggested that the yen could weaken another 20% over the next two years, bending under the pressure of Abenomics.

source