The yen is unlikely to slide as far as 110 against the dollar as the outlook for the global economy remains uncertain and as exporters suffer from a weaker yen due to higher overseas manufacturing costs, a major Japanese fund manager said.
Yuuki Sakurai, CEO and President of Fukoku Capital Management in Tokyo, which handles $16 billion in assets, said the yen's status as a safe haven currency could even cause it to reverse its 20 percent tumble against the dollar if signs of stalling growth in China, a patchy US recovery and euro zone turmoil persist.
While Sakurai said he expects the Japanese currency to stick to around 97 to 98 yen against the dollar for now, he does not believe there's an "ideal" exchange rate that would be broadly advantageous for Japanese companies, which he says are more worried about volatility than the yen's relative strength or weakness. The yen was quoted at 99.84 to the dollar, within striking distance of 100, on Monday morning.
"They like a stable currency so that they can make their strategies," he said in an interview for the Reuters FX Summit.
"Personally, I do doubt that the weak yen will become a strong (tail)wind for the Japanese economy, because so many Japanese manufacturers have sent their production overseas to cope with the strong yen."
One positive effect of a softer yen could be psychological, Sakurai suggests, if investors and the public attribute it to "Abenomics", an aggressive mix of monetary and fiscal policies touted by Prime Minister Shinzo Abe.
"I think (Abe) is trying to send a message to the Japanese," Sakurai said.
"Although he knows that the weak yen is not going to connect directly to the strength of the Japanese economy, he is going to send the message that we are going to revive again, that he could change things, that he can change the direction of the Japanese economy."
Sakurai says that the Nikkei stock index will likely hold around its current level until July on expectations that Abe will achieve a landmark victory in upper house elections expected that month. The index climbed 1.9 percent to 13,574.71 to a near five-year high on Monday morning.
But while investors into Japanese equities can continue to celebrate the benchmark's gain of more than 50 percent since last November, Sakurai said holders of Japanese government bonds were less than pleased with the monetary arm of Abenomics enacted by the Bank of Japan.
The BOJ shocked financial markets on April 4, when new Governor Haruhiko Kuroda announced the plan to inject $1.4 trillion into the economy in less than two years, nearly doubling the monetary base to $2.9 trillion in that time.
"The Kuroda shock...was like shooting a sparrow with a cannon," Sakurai said, adding that smaller and more frequent interventions might be more effective.
"What puzzled me about (Kuroda's) comment was that he said he'd do nothing for the time being. That means he's showed every card he has. That's not a very good policy from the central bank."
Kuroda's radical rehaul of monetary policy created a 'dilemma' for institutional investors, Sakurai said.
The BOJ appeared to suggest that investors should switch their money to foreign bonds from Japanese debt, but that would leave them vulnerable to currency fluctuations, Sakurai said.
Smaller local institutions and rural banks will also be stung by the illiquidity in the JGB market caused by the BOJ's actions, Sakurai said, although investors willing to go abroad will likely find comfort in low-risk government bonds from the United States, Canada and Germany.
Sakurai also takes issue with the BOJ's determination to achieve two percent inflation within two years, a goal that has become a constant refrain for both Kuroda and Abe.
"The target is to have a good economic recovery, not to have two percent inflation in two years...Look at the UK: you have two percent inflation and the economy is bad," he said.
However, Sakurai believes the Japanese economy could improve merely on expectations of Abenomics, if skyrocketing Japanese stocks prompt companies to increase wages and lead consumers to part with more of their cash.
"There is a separation between the actual economy and the market at this moment," he says.
"Whether the real economy will catch up with the market, or the market is going to adjust to the real economy, we are not quite sure at this moment. If this continues, we may see a kind of mini-bubble in equities and a real estate bubble. If that continues, it's a kind of disaster for the Japanese market."
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