Traders turn on yen as global energy crisis deepens


Currency traders say the yen could be poised for further losses after the Japanese currency slumped to its lowest level against the dollar in three years, squeezed by the rising cost of the imported energy on which the world’s third-largest economy depends.

The yen sank to ¥114.38 to the US dollar on Saturday, a level not seen since late 2018, after three weeks of steep declines. Investors say the global surge in energy, which means Japan’s importers will have to sell increasing quantities of yen to purchase oil and gas, has triggered the recent moves.

But the yen has also come under pressure as the Bank of Japan’s determination to stick with its ultra-loose monetary policy puts it increasingly out of step with other big central banks, which look primed to lift interest rates in response to rising inflation.

“We have a real policy divergence going on here,” said Athanasios Vamvakidis, head of G10 forex strategy at Bank of America, who expects the yen to fall to ¥116 by the end of the year. “The Fed might start hiking next year, while the BoJ is stuck at zero.”

Forex traders in Tokyo said the yen had definitively fallen out of its long-term comfort zone against the dollar and would now move with far more volatility than it had done over the past two to three years. The prospect of rising yields outside Japan was likely to tempt investors to look overseas for chunkier returns, further weakening the yen, said one senior forex broker at a Japanese securities house.

“Given that we are not yet hearing much concern on inflation in Japan, I think we are looking at a lot of people who have not been trading currency — especially retail — coming back into the market selling yen to buy yield offshore,” the broker said, adding that a return to levels of less than ¥120 to the dollar for the first time in five years was possible later this year.

That would probably prompt verbal warnings from authorities over the yen’s weakness, although the first direct intervention in currency markets since 2011 was highly unlikely, the broker added.

Plans for a new ¥10tn university endowment fund, part of a bid to make Japan’s scientific research globally competitive, may add to the pressure on the yen, according to some analysts. The fund — highlighted as critically important by new prime minister Fumio Kishida in an interview with the Financial Times on Thursday — has ambitious plans based on the expectations of significant returns on its fund, meaning that it must focus investments away from the wafer-thin-to-negligible returns on domestic bonds.

Analysts at Nomura Securities said that while the exact investment strategy of the new fund was not yet clear, it seemed likely that the bulk of the 35 per cent of the portfolio designated for bond investment would be directed overseas. Investment bank Nomura estimates that of the fund’s initial investment of ¥4.5tn, there will be an implied yen selling of about ¥2.7tn.

“Concentrated investment in a short period of time could boost [the dollar against the yen] by as much as around ¥1 even in the current low-volatility environment,” said Nomura forex strategist Yujiro Goto. “Moreover, speculators could push the yen even weaker if they view this as a catalyst.” 

Still, some investors are betting the yen’s drop has gone too far. Ugo Lancioni, head of currency management at Neuberger Berman said that the recent moves smacked of “panic selling” as traders looked for ways to profit from the energy price spike. He is sceptical about a return wave of outflows from Japanese investors seeking higher returns abroad, given the gap between US and Japanese bond yields remains narrow in historical terms.

The spread between the two countries’ 10-year bonds, for example, stands at 1.44 percentage points. Last time the yen sank to similar levels, the gap was about double that.

Lancioni cautions that any ramping up of concerns over the health of the global economy could quickly see the yen revert to its customary role as a safe harbour, if Japanese investors sell risky overseas assets and bring their cash home.

“If this inflation scare triggers global growth concerns we could see price action heading the other way,” he said. “Suddenly the relationship flips over again.”