Fed’s Dollar Anxiety Stoked by Stimulus-Minded BOJ: Currencies

(For a Currencies column daily alert: SALT FXCOL.)

Oct. 10 (Bloomberg) — The potential for a currency war between the U.S. and Japan is building as monetary policies diverge and officials become increasingly vocal about their exchange rates.

While U.S. Federal Reserve policy makers start to raise concern that the dollar’s recent strength will curb growth as it pulls back on stimulus measures, the Bank of Japan is banking on policies designed to weaken the yen and boost its economy.

What happens between the dollar and the yen is growing in importance after Bank for International Settlements data showed the pair changing hands at a pace that will have it overtake dollar-euro as the most widely-traded exchange rate by 2016. Japanese investors see their nation coming out on top as BOJ Governor Haruhiko Kuroda says he will go on expanding the money supply just as the Fed begins to pull back on stimulus measures.

“The U.S. is moving toward an exit; the Japanese central bank is still expanding its balance sheet,” Hajime Nagata, a money manager in Tokyo at Diam Co., which oversees the equivalent of $130 billion, said yesterday by phone, adding that this is his opinion not the firm’s. “There’s a huge difference.”

The yen will slide 3.7 percent versus the greenback by mid-2015, the biggest drop among 16 major peers, Bloomberg surveys show. Goldman Sachs Group Inc. cut its forecast for the yen yesterday, expecting it to weaken to 115 per dollar in 12 months from a prior estimate of 110.

‘Many Options’

Japan’s currency reached a six-year low of 110.09 on Oct. 1, before trading at 107.83 as of 9 a.m. in Tokyo. It will continue to weaken through the end of 2014, Nagata said.

Minutes of the Fed’s last policy meeting, published Oct. 8, showed that officials are concerned a stronger currency will restrain the U.S. economy. Hours later, BOJ Governor Kuroda said in New York that Japan has “many options” for adding stimulus, suggesting he remains committed to boosting inflation and spurring growth.

Responding to questions after a speech to the Economic Club of New York, Kuroda signaled the BOJ has scope to buy more Japanese government bonds and private debt, and pledged to adjust its asset-purchase program “without hesitation” if needed. Earlier in the week, officials ended a policy meeting by reiterating a pledge to buy 60 trillion yen ($557 billion) to 70 trillion yen of government bonds a year.

Broad Rally

Just as Japan’s pledge to expand its monetary base is debasing the yen, the dollar is being supported with the Fed moving toward ending its bond-buying program this month as a precursor to raising interest rates as soon as next year. The dollar has climbed versus all its 31 most-traded peers tracked by Bloomberg in the past six months, except China’s yuan.

Officials at the Federal Open Market Committee’s Sept. 16-17 meeting warned that the stronger dollar may hamper exports, and said the economy could be hurt by a global slowdown. That boosted speculation the Fed may delay raising its target rate from the zero to 0.25 percent range it’s been in since 2008, causing the greenback to fall Oct. 8 versus most of its peers before rebounding yesterday.

“You can make the case that the run in the dollar for the moment is going to pause,” John Gorman, the head of dollar interest-rate trading for Asia-Pacific at Nomura Holdings Inc., said yesterday in a phone interview from Tokyo.

Rate Outlook

There’s a 57 percent chance the Fed will lift rates to at least 0.5 percent by September 2015 futures data compiled by Bloomberg show. The yen will still weaken to 112 per dollar by Dec. 31 and 120 by the end of next year, according to Nomura, the Japanese currency’s most accurate forecaster for the four quarters ended Sept. 30 based on data compiled by Bloomberg.

“Dollar strength remains in place and, if anything, is strong now that growth outside the U.S. looks to be weakening,” Goldman Sachs strategists led by Robin Brooks in New York wrote in a report to clients yesterday.

The latest triennial survey by the Bank for International Settlements in Basel, Switzerland shows that dollar-yen transactions made up 18.3 percent of all foreign-exchange trading in April 2013, up from 14.3 percent three years earlier. The dollar-euro fell to 24.1 percent from 27.7 percent.

The phrase “currency war” was popularized by Brazil Finance Minister Guido Mantega in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. The losers were often emerging-market economies, which saw their exchange rates soar against the dollar.

Estimates Cut

Spurring global growth will be on the agenda for finance ministers and central bankers gathering in Washington this week for annual meetings of the World Bank and International Monetary Fund. The IMF cut its global growth forecast for 2015 to 3.8 percent on Oct. 7, from an estimate of 4 percent in July.

Hedge funds and other large speculators are increasing bearish bets on the yen, data from the Commodity Futures Trading Commission in Washington show. So-called net shorts rose to 120,878 in the week ending Sept. 30, the most since January and up from a 1 1/2-year low of 53,787 contracts on May 20.

“The yen weakening trend is here to stay” unless the BOJ “starts to move toward an exit policy,” Daisaku Ueno, the Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co., said yesterday by phone. “Sporadic warnings against dollar gains may slow its appreciation, but won’t be a big enough trigger to change its strengthening trend.”

To contact the reporters on this story: Wes Goodman in Singapore at [e-mail]; Hiroko Komiya in Tokyo at [e-mail] To contact the editors responsible for this story: Garfield Reynolds at [e-mail] Paul Armstrong