Fidelity Sees Yen Falling as Low as 120 as BOJ-Fed Diverge (1)

(Bloomberg) -- The chief investment officer of Fidelity International in Japan sees divergent monetary policies helping to weaken the yen to 110 to 120 per dollar by the end of 2017.

The Bank of Japan’s switch of focus to controlling the government bond yield curve from hoarding debt will help prevent yen gains hurting the economy, Takashi Maruyama, the chief investment officer at FIL Investments (Japan) Ltd., said in an interview. The currency could weaken significantly if expectations overseas for inflation pick up and moderate growth of around 2 percent in the U.S. can be achieved, facilitating Federal Reserve rate increases, he said.

“The BOJ’s policy is one that seeks to exploit the changes in the external factors,” said Maruyama at Fidelity’s Tokyo office last week. “Stopping the yen from strengthening is something that needs to be achieved on a medium- to long-term basis and that was impossible with the BOJ’s purchasing program, so the BOJ has committed to a yield objective, increasing sustainability. It is very logical.”

The U.S. currency has strengthened 4.1 percent against the yen since Sept. 21 when the BOJ committed to keeping long-term yields around zero, while signs of faster economic growth and accelerating inflation in the U.S. are fueling bets of monetary tightening by the Fed. Halting a further appreciation of the yen is prerequisite to spurring Japanese growth and consumer-price increases, according to Maruyama, who said the dollar could temporarily surpass the 120 yen level next year. The median forecast of analysts surveyed by Bloomberg is for the yen to be at 105 in final quarter of 2017.

Bank of America Merrill Lynch is forecasting the Japanese currency to weaken to 115 against the greenback by the end of 2017 as BOJ’s yield-control policy reduces risks around the sustainability of its measures, according to Shusuke Yamada, a currency strategist at the U.S. investment bank in Tokyo. The fixing by the BOJ of 10-year bond yields may allow the government to undertake fiscal spending to spur inflation while avoiding a strengthening in the yen, he said.

“There were questions about the sustainability of the BOJ’s monetary policy, and a feeling that no matter how much they intensified their efforts, it wasn’t working,” said Yamada. It was easy to push the yen higher in that environment, and those risks have now decreased, he said.

The yen is unlikely to weaken beyond 125 per dollar next year, according to Fidelity’s Maruyama. The Japanese currency was at 104.42 around 11 a.m. in Tokyo on Tuesday, down from a high of 103.72 on Monday.

Maruyama sees the Fed lifting rates in December and again in 2017. While the BOJ was unable to achieve its inflation target as oil prices suppressed import costs, Japan’s companies did for a time successfully manage to pass on higher prices under Prime Minister Shinzo Abe’s tenure, he said. The current framework by Japan’s monetary authority may allow them to do so again if overseas factors turn favorable, Maruyama said.

“If we see some tailwinds emerge when the Japanese economy is in the process of moving to a regime change, this policy will be very effective,” Maruyama said. “In a very unpredictable world, where it has become hard to read monetary policy with inflation concerns and a recovery in oil prices, Japan has become very predictable.”

(Updates move in dollar in fourth paragraph.)

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net, Tesun Oh in Tokyo at toh15@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Sandy Hendry at shendry@bloomberg.net, Ken McCallum, Tomoko Yamazaki

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