Yen Bears See Vindication in New BOJ Under Abe Watch: Currencies – Bloomberg

For long-suffering bears on the yen,
redemption is looking more likely if options are any guide.

After appreciating more than 60 percent between July 2007
and June of this year, the yen has tumbled almost 9 percent
against a basket of developed-market currencies, including a
drop of 2.2 percent last week, data compiled by Bloomberg show.
Option traders are paying record premiums to protect against
further depreciation as Prime Minister Yoshihiko Noda calls for
elections next month.

Polls signal the main opposition Liberal Democratic Party
will win elections on Dec. 16, led by Shinzo Abe who last week
called for the Bank of Japan (8301) to pursue unlimited bond purchases
and zero-to-negative interest rates. BOJ Governor Masaaki Shirakawa is due to step down in April after a five-year term.

“This is a major shift and the key event is the
replacement of Shirakawa,” said Jens Nordvig, a managing
director of currency research in New York at Nomura Holdings
Inc. “It really is a change that would move the BOJ away from
being the least expansive in terms of balance sheet use to
potentially being ahead of the other central banks.”

At the same time, trade surpluses that have served as a
main pillar of support for the yen are starting to erode.
Japan’s imports exceeded exports by 3.22 trillion yen ($40
billion) in the six months ended Sept. 30, the biggest trade
deficit for a fiscal half-year period, according to Ministry of
Finance data going back to 1979.

Lost ‘Powerhouse’

“Japan’s descent into a constant trade deficit takes some
gloss of the yen as a haven and is a cause for weakness in the
currency,” said Satoshi Yamada, the Tokyo-based manager of
fixed-income trading at Okasan Asset Management Co., which
oversees about $11 billion. “I can’t really see any way Japan
can regain its status as an export powerhouse.”

The surplus in the nation’s current account, the broadest
measure of trade, had made Japan less reliant on foreign capital
to fund its budget deficit and a debt load that has swelled to
237 percent of gross domestic product, which International
Monetary Fund data show is the most of any developed nation. The
ratio for the U.S. is 107 percent.

“People have lost a fortune,” betting against the yen in
recent years “because it just hasn’t gone down,” John Taylor,
the founder of FX Concepts LLC, said Nov. 15 at the Bloomberg
FX12 Summit in New York. The hedge fund, which managed about $3
billion at the end of September, has trades set up to profit
from the yen’s decline, he said.

Currency Options

The currency fell 2.3 percent last week to 81.32 per
dollar, and weakened 2.5 percent to 103.60 per euro.

Three-month options show a record premium for dollar calls,
which grant the right to buy the U.S. currency against the yen,
over puts, which confer the right to sell. The 25-delta risk
reversal rate, which measures the difference between implied
volatility on similar puts and calls, reached 0.945 percent on
Nov. 15, before ending the week at 0.89 percent.

That compares to an average of a 1.8 percent in favor of
dollar puts since Bloomberg began collecting the data in 2003.

“The market is making a bet that this call for an election
is a paradigm shift,” John Hardy, the head of foreign-exchange
strategy at Saxo Capital Markets in London, said in a Nov. 16
interview. “It’s deserving of a paradigm shift because it’s not
about interest rates anymore it’s about the relative
determination to competitively devalue your currency.”

Exporters Punished

The two currencies have historically risen and fallen along
with differences in short-term interest rates. The rolling
correlation over 30 days between the nations’ two-year swap rate
plunged to 0.1 from 0.4 on the day Abe, 58, said the BOJ should
provide enough stimulus until the inflation rate reaches 3
percent. A value of 1 indicates the assets move in unison.

Saxo sees the yen falling to 90 per dollar in 2013,
compared with the median estimate of 83 among more than 40
strategists and economists surveyed by Bloomberg.

The yen has advanced 36 percent versus the dollar in the
past five years, the most of more than 150 currencies tracked by
Bloomberg. The currency’s strength punishes exporters as it
makes their goods more expensive overseas and diminishes the
value of repatriated income.

Japanese exporters can remain profitable as long as the yen
is 82 yen per dollar or weaker, an annual Cabinet Office survey
showed in February. The BOJ’s latest Tankan report showed the
country’s large manufacturers expect it will average 79.06 in
the year through March 2013.

Panasonic, Sharp

Panasonic Corp. (6752) said it plans to cut 8,000 jobs in the
second half of this fiscal year after firing 8,871 workers in
the six months ended Sept. 30. Sharp Corp., the worst performer
in Japan’s benchmark Nikkei 225 Stock Average in the past year,
said this month there was “material doubt” about its ability
to survive as it forecast a record net loss of 450 billion yen
in 12 months through March.

The yen has strengthened about 12 percent since Noda’s
Democratic Party of Japan came to power in September 2009,
displacing the LDP that had governed the nation for all but 10
months since 1955.

“The LDP has traditionally been closer to exporters
relative to the DPJ,” said Masafumi Yamamoto, the Tokyo-based
chief foreign-exchange strategist in at Barclays Plc, said by
phone on Nov. 16. “An LDP administration, if realized, will
have more of a prerogative to prevent the yen’s appreciation.”

Barclays sees the yen trading at 83 to the dollar in three
months and 86 in a year.

Asahi Poll

Support for Noda, 55, fell 6.1 percentage points to 17.3
percent, the lowest since he took office in September 2011, in a
poll published by Jiji Press on Nov. 15. When asked who would be
a better prime minister, 32.5 percent of respondents to the Jiji
poll picked Abe, 17.2 percent picked Noda and 50.6 percent said
they didn’t know, or couldn’t answer.

Since the yen reached a postwar record of 75.35 per dollar
last year, the BOJ and government have enacted 44 trillion yen
in asset purchases and intervention. Even so, Shirakawa, 63,
remains a lightning rod for criticism by lawmakers and companies
who say the BOJ isn’t doing enough to weaken the currency and
fight deflation. Consumer prices have fallen an average of 0.5
percent per month in the past decade.

“The view is spreading that Japan’s deflation will ease,
removing some upward pressure for the yen, ahead of the
elections and replacement of Shirakawa,” Masataka Horii, who
runs Asia’s biggest mutual fund at Kokusai Asset Management Co.,
said in an interview in Tokyo on Nov. 15.

Kokusai Holdings

Horii’s $18.1 billion Kokusai Global Sovereign Open Fund (1131197C)
had 7.4 percent of its assets in yen-denominated debt, compared
with 27 percent and 11 percent for dollar- and euro-based
holdings, according the company’s website. The yen portion has
been as low as 4 percent, Horii said.

“There is still room for us to cut yen holdings,” Horii
said.

With Europe’s debt crisis flaring again as concerns rise
that Greece may exit the euro and as the U.S. faces more than
$600 billion in mandated spending cuts and tax increases
starting Jan. 1, investors are likely to seek the relative
safety of the yen, according to Mizuho Securities Co.

“I wouldn’t be a surprised if investors flip their short
positioning in the yen any time,” said Kengo Suzuki, a currency
strategist in Tokyo at the unit of Japan’s third-largest bank by
market value. “Investors are growing cautious as they see the
U.S. fiscal cliff and Greece as a couple of the biggest risks.
Upward pressure for the yen is likely to increase.”

‘Somewhat Skeptical’

Even if the BOJ heeds Abe’s call for more monetary easing,
it may be offset by competing pledges of unlimited stimulus from
the Federal Reserve and other central banks, according to
Valentin Marinov, head of European Group of 10 foreign-exchange
strategy at Citigroup Inc.

“I’m still somewhat skeptical as to whether the yen
actually could indeed weaken that much against the dollar in the
near future,” Marinov said in a Nov. 15 interview with Mark
Barton on Bloomberg Television’s “Countdown.”

Japan’s economic growth is forecast to slow to 1 percent
next year from 2.1 percent in 2012, according to the median
estimate of analysts surveyed by Bloomberg.

Hedge funds and other large speculators have been betting
on a decline in the yen for the past four weeks. So-called net
shorts have averaged 31,442 contracts over that period, compared
with average net longs of more than 18,000 in the prior four
months, figures from the Washington-based Commodity Futures
Trading Commission show.

“With the economy heading back into recession, we have a
recipe for more aggressive easing,” Robert Rennie, the chief
currency strategist at Westpac Banking Corp. (WBC) in Sydney, said in
a phone interview on Nov. 15. He expects the yen to weaken to 81
in the first quarter of 2013.

“The BOJ has consistently shown over the last three to six
months that they are willing to respond to that pressure.”

To contact the reporters on this story:
Allison Bennett in New York at
abennett23@bloomberg.net;
Monami Yui in Tokyo at
myui1@bloomberg.net

To contact the editor responsible for this story:
Rocky Swift at
rswift5@bloomberg.net