An increase in the Bank of Japan's asset purchase programme and dimming prospects for more US money printing will weaken the Japanese yen and likely prevent it from returning to levels that have prompted intervention, a Reuters poll showed. With official interest rates at the zero barrier, the BoJ, like its counterparts in the US, UK and the euro zone have little room to manoeuvre monetary policy except the printing presses and huge injections of temporary cash.
The yen fell almost seven percent in February after the BoJ increased its asset purchases programme by 10 trillion yen ($123.86 billion). At the same time, better US economic data have reduced the chances of another round of money printing there. That sharp fall in the yen surprised alike traders and analysts who were calling for more strength in the safe-haven currency, at least in the short term.
The US dollar is now expected to buy 80 yen at the one-, three- and six-month horizons and 83 yen in a year, according to the median consensus of 60 strategists polled this week. Indeed, data from the US Commodity Futures Trading Commission showed net positions in the Japanese yen turned short at the end of last month, for the first time since May 2011. That means the currency is likely to weaken from current levels over the next few months.
"We were surprised at the scale of the bounce in dollar/yen in February," said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi. "The key catalyst that pushed the dollar/yen higher was the BoJ monetary policy decision in February - the formalisation of an inflation goal and the 10 trillion yen increase in asset purchases."
Massive amounts of money hosed out by major central banks are also adding to the liquidity in financial markets and fuelling carry trades, where investors sell low-yielding assets to buy into higher-yielding ones. But with concerns rising over the success of the debt swap deal in Greece, in which creditors stand to lose up to three-quarters of the value of their holdings, the yen may soon reverse its weakening trend as investors scurry to buy the safe-haven currency.
Since March 2011, when the island nation was struck by a massive earthquake, tsunami and nuclear crisis, the Japanese yen has faced extreme buying pressure owing to repatriation of funds to undertake the massive reconstruction efforts. The US dollar weakened to levels near 75 yen in the immediate aftermath of the disaster and forced Japanese authorities to intervene in foreign exchange markets and prevent a sharp appreciation in the currency, which is detrimental to the health of its export-dependent economy.
The reconstruction was initially expected to boost the economy into a higher growth trajectory but almost a year later, economic growth in Japan is still contracting and is now expected to recover only gradually this year. While the majority of the banks in the March survey called for a weaker yen in 12 months' time - in line with the historical tendency among forecasters - some of the biggest names in the business forecast a reversal in the trend and see the yen tread higher from current levels.