REUTERS/Shohei Miyano
The yen’s key drivers are so weak the currency is comparable to the Turkish lira and Argentine peso, Deutsche Bank said.
Japan has record low real yields due to the central bank’s refusal to tighten policy, an analyst said.
The country’s balance of payments are also weak as the Bank of Japan has triggered capital flight.
The Japanese yen’s fundamentals are so weak the currency is comparable to some of the world’s worst performing tenders, a Deutsche Bank note said on Wednesday.
“A simple glance of the yen’s drivers – yields and external accounts – puts the Japanese yen in the same league as the Turkish lira and Argentine peso,” George Saravelos, the bank’s global head of foreign exchange research, wrote in the report.
To be sure, the yen’s losses against the dollar aren’t nearly as steep, having dropped 15% so far this year while the lira has tumbled 51% and the peso has collapsed 97%.
But in the case of the yen, its issues are the direct result of the Bank of Japan’s unique yield curve control and the central bank’s refusal to lift interest rates, resulting in record low real yields, Saravelos said.
The other driver of the yen’s weakness, balance of payments, is also due to the Bank of Japan, which has essentially engineered “slow-motion capital flight from domestic investors into foreign assets,” he added, noting that Japanese government bonds are relatively unattractive.
“If you are Japanese, what is the point of buying a 5-year JGB with a nominal yield of 50bps when you can buy a 5-year US treasury with a real yield of 3%?” he said.
Intervention by the Bank of Japan in currency markets won’t help the yen, and may actually backfire.
That’s because selling dollar-denominated reserves like Treasurys would add upward pressure on US yields and boost the dollar, Saravelos explained.
“More critically it will lead to a deterioration of the Japanese government’s external balance sheet and by extension its fiscal position,” he wrote.
To stabilize the currency, he suggested that the BoJ should begin hiking rates and eliminate its quantitative easing campaign. Otherwise, yen volatility will increase if domestic investors start questioning the bank’s willingness to act.
While Japanese authorities have recently taken fresh steps to loosen its yield restrictions, the shift has underwhelmed traders. After brief gains on Tuesday, the yen hit a new low of 151 against the dollar.