U.S. Markets

Yen to slip over next year on carry trades, BOJ stimulus

(Reuters) - The yen’s recent weakness will continue over the coming year as Japanese investors look overseas in search of higher returns, particularly as U.S. bond yields rise further, a Reuters poll found on Wednesday.

Japanese 10,000 yen notes are spread out at Interbank Inc. money exchange in Tokyo, in this September 9, 2010 picture illustration. REUTERS/Yuriko Nakao

The latest poll of 62 currency strategists and analysts put the yen at 99 per dollar in a month, 100 in three months and 105.5 in a year, little changed from last month’s poll.

Aggressive monetary stimulus from the Bank of Japan, which pledged in April to pump about $1.4 trillion into the economy in less than two years through asset purchases, has kept downward pressure on the yen.

Since Prime Minister Shinzo Abe kicked off the most aggressive stimulus program yet to haul the Japanese economy out of decades of deflation, known as Abenomics, the yen has lost around 26 percent.

Strategists expect it to shed more than 7 percent over the next 12 months.

“We’re looking at U.S. bond yields to move significantly higher relative to Japanese JGB yields. I think that will be an important factor driving dollar-yen higher,” said Mitul Kotecha, global head of FX strategy at Credit Agricole.

The 10-year Japanese government bond (JGB) yield was last at 0.605 percent on Wednesday. In comparison, the U.S. 10-year Treasury yield was at 2.653 percent.

Strategists expect this difference in yields to widen further and prompt an increase in carry trades - a trade idea that involves borrowing in a low-yielding currency to buy a higher-yielding or riskier one to earn better returns.

“As we see a widening in yield differentials it will be more compelling for Japanese investors to pump more money overseas into foreign assets or markets,” Kotecha said.

Predictions of more monetary easing from the Bank of Japan to offset a fallout from an announced sales tax hike next year, even as the U.S. Federal Reserve is expected to taper its stimulus program instead, will also weigh on the yen.

“They’re (BOJ) committed to doubling their balance sheet by the end of 2014 and at some point the Fed is going to slow the pace of its balance sheet expansion,” said Christopher Turner, head of FX strategy at ING Financial Markets.

Even if BOJ sticks to its current script, it is very aggressive and will be enough to weaken the yen, Turner added.

But there are some signs that Abenomics is losing some of its punch. Japan’s September export growth fell well short of expectations, mirroring similar trends across other countries in Asia.

Currency speculators increased bets against the yen in the latest week, according to data from the Commodity Futures Trading Commission. And strategists are bullish on the dollar.

“I would still be inclined to buy dollar-yen in the long term,” said Jane Foley, senior FX strategist at Rabobank.

However, the possibility of another political battle in the United States over the country’s budget could see the yen strengthening early next year instead, particularly as the last U.S. fiscal standoff resulted in a 16-day government shutdown.

($1 = 98.5450 Japanese yen)

Reporting by Deepti Govind; editing by Stephen Nisbet