* Japan institutions will likely determine how far yen could
* Yen's fall could intensify if domestic investors
By Lisa Twaronite and Chikako Mogi
TOKYO, April 8 A U.S. dollar bill could soon be
worth the same as a Japanese 100-yen coin for the first time
since April 2009, as investors price in the Bank of Japan's
aggressive monetary expansion.
The yen plunged to fresh lows against major currencies early
in Asia on Monday, coming within less than two yen of the 100
mark against the dollar, as the Japanese central bank took its
first steps to whip deflation under its bold new scheme.
Once that milestone is breached, some strategists say
profit-taking could temper the greenback's rally, though the
appetite of Japanese life insurers for higher-yielding foreign
assets is likely to maintain downward pressure on the yen for
much of this year.
The BOJ conducted its debut bond-buying operation on Monday,
purchasing 1.2 trillion yen ($12.35 billion) of longer-dated
debt, as the first step of its stimulus plan unveiled on April 4
to inject about $1.4 trillion into the economy in less than two
The fact that the central bank wasted no time in backing up
its vows with action vanquished any remaining scepticism about
its resolve to beat almost two decades of deflation, giving yen
bears more reason to smile.
"This has really shaken up many people's attitudes toward
the BOJ and the new government," said Andrew Wilkinson, chief
economic strategist at Miller Tabak & Co in New York. "It feels
like it's gathered a whole new momentum behind it, as the
doubters have joined the bandwagon and it's becoming a
The dollar surged as high as 98.85 on Monday, gaining
more than a full yen from Friday's late North American levels to
its highest since June 2009.
Wilkinson, who in November last year predicted that the yen
would test 100 per dollar as early as June, expects the 100-110
yen level will hold "for now."
But a clear sign of outbound investments from big Japanese
institutional investors is crucial for the weak yen trend to
Investment flows out of Japan and into higher-yielding,
high-quality assets have already begun, with French, Dutch,
Austrian and Belgian bond yields all falling to record lows on
Friday in the wake of the BOJ's stimulus announcement.
FOCUS TURNS TO JAPANESE INSTITUTIONS
The pace of the yen's continued fall largely depends on the
extent to which yield-hungry Japanese institutions follow suit,
strategists say. With hedging costs low, their initial forays
are likely to be fully hedged, though this could change as their
risk tolerance rises in line with higher Japanese equities
"With the BOJ's new policy squashing yields across the curve
to super-long JGBs, the probability of Japanese life insurers'
money flowing into foreign assets will rise significantly," said
Yunosuke Ikeda, senior currency economist at Nomura Securities.
Japanese investors might consider removing hedges and start
buying foreign bonds unhedged towards the end of the year, he
said, when expectations grow that U.S. quantitative easing will
slow and more investors believe the U.S. Federal Reserve is
closer to exiting from its ultra-accommodative U.S. monetary
After Japan's upper house election in July, rising
expectations for the government to embark on structural reforms
could buoy Japanese stocks, which in turn would boost investors'
risk-taking appetite and could prompt more unhedged foreign bond
buying, Ikeda said.
"Towards the year-end, the pace of yen selling may slow as
short-term speculators unwind their yen short positions
while long-term investors will continue to bet on a sustained
weak yen trend," he said.
While the BOJ's push was clearly the catalyst for the yen's
plunge, global economic conditions also contributed to the
Japanese currency's downward spiral. As some economists
cautiously believe the worst might be over for both the United
States and Europe, the dollar above the 100-yen level would
represent a return to the status quo.
The yen's record high of 75.311 against the dollar was
struck in October 2011, against a backdrop of a debt crisis
roiling European markets, and worrying signs about U.S. growth.
Investors piled into the yen at the time for its safe-haven
appeal relative to its global counterparts, but many of those
factors have now faded.
Some strategists and investors fret that with the BOJ
committed to its radical gamble to beat deflation, the yen's
sell-off might become a one-way bet.
"If it takes a strong medicine to fix the malaise, my
concern is what if the medicine's effect is felt too strongly,"
said Takao Hattori, senior investment strategist at Mitsubishi
UFJ Morgan Stanley Securities.
"Japanese investors have yet to ride on the yen selling but
if they start to do so, the move could accelerate," he said.