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Nomura says Kuroda waiting too long risks irreversible damage

Thursday, January 28, 2016 - 16:02
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Japanese 10,000 yen banknotes are arranged for a photograph in Tokyo, Japan, on Feb 25, 2013. Japan Inc's currency cookie jar may be just about empty.

[TOKYO] Yen bear Nomura Holdings Inc says the Bank of Japan risks "irreversible damage" to the economic recovery if it fails to check the currency's world-beating rally.

The central bank decides policy Friday, with the yen at 118.73 per dollar as of 7:23 am Thursday in London, after a 4.1 per cent surge in six months that was the most among 31 currencies against the greenback. Japan's biggest brokerage, which sees a weakening to 130 this year, says the central bank must act to prevent corporate gloom from scuppering investment and wage increases if the exchange rate strengthens beyond 115.

"If the BOJ forgoes additional stimulus and just lets the yen appreciate in an environment of worsening sentiment, it will do irreversible damage," said Yunosuke Ikeda, head of Japan foreign-exchange research in Tokyo at Nomura Securities Co. "With a 118 handle, the odds of easing are about 30 per cent. For 117, it's 50:50. For 116, it's 70 per cent. That's the kind of image I have."

BOJ Governor Haruhiko Kuroda has been thwarted in his quest for a virtuous cycle of demand-led inflation by falling oil prices, a strengthening currency and a tumbling stock market. While 36 of 42 economists polled in recent days don't see an expansion of asset purchases being announced this week, only 13 don't expect a boost to stimulus in the foreseeable future.

Even with the exchange rate weaker than 115 per dollar, there are merits to acting preemptively to shore up sentiment at a time when companies are drawing up plans for the fiscal year beginning in April, Ikeda said in a Jan. 26 interview. His yen call, held since the end of 2014, is among the most bearish of more than 50 forecasts compiled by Bloomberg.

Kuroda said in an interview last week in Davos, Switzerland that "at this stage, we don't think the current market situation has been affecting corporate behavior unduly," while noting that "markets could affect the real economy - so we carefully watch." He reiterated that the central bank will do "whatever it takes" to achieve its target of stable 2 per cent inflation.

Nomura, which topped Bloomberg's dollar-yen rankings for 2014, stands against a growing stampede of bulls after a global equity selloff spurred demand for haven assets that drove Japan's currency to a one-year high of 115.98 on Jan. 20. Hedge funds and other large speculators increased net long yen bets against the greenback to an almost four-year high this month, according to data from the Commodity Futures Trading Commission. Overall positions turned bullish in early January for the first time since October 2012, the month before then-opposition leader Shinzo Abe called for unlimited monetary easing, beginning the Abenomics era.

Oil, China Ikeda saw his 125 estimate for 2015 derailed by oil's march lower and China's stuttering economy - themes that have continued into 2016. The yen dropped to a 13-year low of 125.86 in June of last year, only to rebound to 120 by year-end.

The central bank exacerbated the appreciation with technical tweaks to its stimulus program in December that prompted foreign investors to bet Kuroda was reluctant to expand easing further, Ikeda said, and currency strength is something the monetary authority can ill afford when its benchmark inflation gauge has been stuck near zero for close to a year.

The BOJ chief will need to shock markets again in order to reignite the trend for a weaker currency, according to Ikeda, who predicts an increase in the target for expanding the monetary base to 100 trillion yen (US$842 billion) annually from 80 trillion yen. That would include additional sovereign-debt purchases and a doubling of exchange-traded fund buying, as well as the central bank hinting at adding assets such as municipal and corporate bonds to the menu, he said.

Ikeda is among analysts who see a limit approaching for Japanese government bond purchases, despite Kuroda's statements to the contrary. So in order to prevent investors from thinking he's taking the "last shot" with his bazooka, Kuroda could also mention the possibility of a cut to the interest rate on bank's excess reserves, Ikeda said.

"That would be a total game changer," Ikeda said. "It would raise the idea that Kuroda could scrap the current policy framework for negative rates in the future." The yield on the benchmark 10-year JGB was at 0.225 per cent on Thursday, after plunging to a record 0.19 per cent on Jan 14.

The only thing that would shake Ikeda's conviction for further yen weakness would be if the BOJ just stands by while the currency keeps appreciating - a scenario he calls "unthinkable." "Japanese don't believe yen weakness is over - so everyone's just watching and waiting," he said. "If the yen breaks 115 per dollar, that will encourage a kind of spiral where everyone starts to give up on that weak-yen scenario. It will put the brakes on all kinds of investment flows, and the yen may not even get back to 125, let alone 130."

BLOOMBERG