The Bank of Japan’s defense of the yen is unlikely to work, according to Deutsche Bank AG’s global head of currency research, who compared the currency to two worst performing currencies in emerging markets during the last decade.
“A simple look at the factors driving the yen—performance and external accounts—places the Japanese yen in the same league as the Turkish lira and the Argentine peso.”, says George Saravelos in a note to clients. “Japanese intervention to defend the yen will be at best ineffective and at worst will make the situation worse.”
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Compare the yen with the currencies of these developing countries, which have depreciated more than 90% against the dollar in 10 years, is striking, given its traditional status as a refuge for international investors. The yen is the third most traded currency globally and Japan is the world’s fourth largest economy.
The yen posted its biggest one-day drop since April on Tuesday after a change by the Bank of Japan to its cap on bond yields disappointed investors expecting a tightening of monetary policy and suggested that any move away from an ultra-lax posture would be slow and gradual. Masato Kanda, head of foreign exchange at the Japanese Finance Ministry, said Wednesday that authorities are prepared to act if necessary.
Saravelos claims that any currency intervention by Japanese authorities could further boost the US dollar. He predicts capital outflows from Japan will accelerate as local inflation-adjusted yields move deeper into negative territory.
“The overall poor performance of the yen over the past two years could only be reversed when one very simple thing happens: “The Bank of Japan starts raising rates, and much more than a small move towards zero.”