Yen breaks through 100, Abenomics hits another milestone

TOKYO (Reuters): Japanese Prime Minister Shinzo Abe scored another small victory as the Yen broke below major support of 100 to the Dollar, with markets bracing for further declines over the course of the year that would underpin the export-reliant economy. The Yen fell to as low as 101.20 per Dollar, down more than 2% from Thursday’s high around 98.65, and the lowest level in over four and a half years.

The Yen has declined more than 20% against the Dollar in the past six months and its retreat was the first tangible effect of Abe’s push to end two decades of stagnation with a potent mix of aggressive monetary easing and fiscal expansion. “Those who had lightened their Yen-selling positions are now building up their positions again after the key level was broken,” Citibank chief currency analyst Osamu Takashima said, adding that the market could target 104 to 105 Yen in coming months.

While some officials from the Group of 20 leading economies have voiced concern about Japan’s aggressive easing, the G20 and the Group of Seven industrial nations have accepted Tokyo’s line that the Yen’s slide was a side effect rather than the goal of its policies. Japanese economy minister Akira Amari on Friday repeated Tokyo’s mantra that it had no intention to manipulate currency levels.

Yet, some market players said a feared currency war among Japan’s trade partners might have just become a reality after Australia and South Korea unexpectedly cut rates this week, citing their strong currencies as one of the reasons to act. New Zealand’s Central Bank also confirmed this week it intervened to weaken its currency, for only the second time since it was floated almost three decades ago.

A South Korean finance ministry official said on Friday Seoul was worried about the pace of the Yen’s decline and was studying whether new measures were needed to lessen the impact. Traders, however, expect the G7 policymakers meeting on Friday to be no different from past international meetings and see little reason to expect the Yen’s decline to stop any time soon.

Despite murmurs of discontent among Japan’s trade partners, Abe is likely to see the latest slide in the Yen as yet another milestone in his campaign to revive the world’s third largest economy. So far, his efforts have culminated in a radical monetary expansion ushered in on 4 April by his newly appointed Bank of Japan Governor Haruhiko Kuroda.

In a sign that the Yen’s slide was feeding through to Japanese exporters, the nation’s current account surplus reached its highest level in a year in March as a result of a narrowing trade gap and a boost to overseas income transferred into Yen. The weaker Yen has already shored up profits of export giants such as Toyota Motor while pressuring their rivals.

The Korean economy is particularly susceptible to a weaker Yen because the two countries are fierce export competitors. The won has risen more than 10% against the Yen this year, while Seoul shares are down 2.1%.

Analysts see more downside for the Yen. “Now that Dollar/Yen has finally gotten over the psychological hurdle of 100, there will likely be more (Dollar) buying by those who were skeptical of Abenomics to begin with,” GFT Forex in Grand Rapids, Michigan market strategist Neal Gilbert said. The Yen’s break, below the key level and a still-weak outlook was underscored on Friday with data showing Japanese investors finally reversed their relentless net selling of foreign bonds.

Japanese investors bought a net total of 514 billion Yen (US$ 5.2 billion) foreign bonds in the two weeks to last Friday, data from the Ministry of Finance showed, a sign the massive monetary easing may be pushing them to seek higher returns abroad. Japanese investors had been net sellers of foreign bonds in the 11 of the previous 12 weeks before that, selling 5.87 trillion Yen in total.

The unprecedented scale of the BOJ’s monetary expansion sparked speculation Japanese investors could stampede into a wide range of foreign bonds, from US Treasuries to French or Belgian bonds. To be sure, the Yen’s fall is not all good news for Japan as it will substantially raise the cost of raw materials and energy it largely imports.

“For manufacturers, overall we are thankful that the trend is the Yen’s depreciation, but we are seeing signs of raw material costs rising. Of course that does not mean we will decrease manufacturing in Japan, but we need to think how these costs can be absorbed,” Fuji Heavy Industries Ltd CEO Yasuyuki Yoshinaga, said this week. That is one reason why Japanese companies have been very conservative about lifting their earning forecasts for the current business year ending March 2014.

Still, the Nikkei share average scaled a 5½ year high on Friday as the yen’s decline is seen boosting Japanese exporters’ bottom line.