Yen Forecasters Rethink Pace of Drop as Kuroda Shocks Again

Bank of Japan Governor Haruhiko Kuroda is forcing analysts to think hard about the speed of projected yen declines after he surprised markets for a second time with monetary stimulus.

 

The yen tumbled as much as 2.5 percent to a six-year low of 111.89 per dollar after the BOJ increased its goal for annual monetary base expansion to 80 trillion yen ($720 billion) from 60 to 70 trillion yen previously. That surpassed the median forecast among analysts surveyed by Bloomberg News for the currency to reach 111 at the end of March, and approached the 112 predicted for the end of June.

 

The yen is set for the biggest decline since April 4, 2013, when Kuroda announced the start of unprecedented stimulus to trigger 2 percent inflation in two years. Facing projections for failure in reaching the target on time, Kuroda said today the central bank was aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset.”

 

“The BOJ has dropped another stimulus bombshell,” said Daisaku Ueno, Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “It’s quite possible the yen will drop to 112 or 113 per dollar by the end of the year, or even 115.”

 

“It might be a good time to change our view,” he said, after previously predicting a weakening beyond 110 next year.

 

The yen tumbled 2.4 percent to 111.84 per dollar at 8:42 a.m. in New York. The currency is down 5.8 percent this year.

 

Only three of 32 economists in a Bloomberg survey this month predicted the BOJ would increase stimulus at its meeting today. A further 19 forecast action at a later date, while 10 foresaw no increase.

Slowing Inflation

“The interesting thing is the Fed became more hawkish than expected this week and the sense was maybe the BOJ will remain relatively neutral,” Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London, said by phone. “This has accentuated the sovereign divergence as a major force in markets. The price action tells you it’s a major surprise.”

 

Jones reduced his fourth-quarter forecast for the yen to weaken to 115 per dollar, from 110. Mizuho cuts its forecast to 113 from 112, he said.

 

Today’s decision came hours after a government report showed that core inflation eased to the slowest pace in six months in September. Stripped of the effect of a sales-tax increase in April, core inflation -- the BOJ’s key measure -- was 1 percent.

 

“They were increasingly under pressure to do something,” said David Forrester, Singapore-based senior vice president for Group of 10 foreign-exchange strategy at Macquarie Group Ltd., who says it’s “possible” the yen will reach 114 per dollar sooner than his forecast for the end of March. “It is a pretty big game changer, and we do expect it to weigh significantly further on the yen.”

 

Sources: Bloomberg (31 Oct 2014)