Keeping long-term bond yields at zero is never a good strategy for currency strength. But that is exactly what the Bank of Japan is doing. As a result, the dollar has strengthened 4% against the yen over the last month. Perhaps the only thing holding the yen up this high is the market’s disbelief in the Federal Reserve’s readiness to raise rates. Janet Yellen’s recent speech about running the economy at “high pressure” (Read: inflationary) only reinforced the market’s belief that no interest rate increase is forthcoming. That could be the yen lifeline Tokyo is looking for.
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.