Takeshi Fujimaki, a banker turned opposition lawmaker, said the yen will slide to 200 per dollar once the Bank of Japan can no longer “camouflage” the nation’s default risk.
The yen has dropped more than 20 percent since April 2013 as the BOJ bought Japanese government bonds, reducing borrowing costs on the world’s heaviest debt load to below zero on notes maturing in two years or less. The currency traded at 119.42 per dollar as of 10:12 a.m. in Tokyo. The cost to protect JGBs against non-payment climbed to a 13-month high of 62 basis points yesterday after Moody’s Investors Service cut the sovereign rating ahead of the Dec. 14 elections called by Prime Minister Shinzo Abe.
“Once investors see Japan’s fiscal default through the BOJ’s camouflage, the yen will spiral out of control to 200 per dollar and beyond,” Fujimaki, a former adviser to investor George Soros and who won his upper house seat on a Japan Restoration Party ticket in July 2013, said in an interview in Tokyo on Dec. 1. While the currency will only drop to 140 next year, he said, “we’re still at the early part of the yen’s large-scale depreciation.”
Japan’s lower-house election campaign officially started yesterday, with the focus on Abe’s economic policies after the country slid into recession. Some opposition lawmakers have pointed out that the weaker yen is raising costs for consumers, while others say Abe must reduce government spending. The ruling Liberal Democratic Party says Abenomics has created jobs and spurred a rally in financial and property markets.
‘Deflationary Mindset’
Abe called the election to seek public support for his decision last month to postpone a sales-tax increase needed to rein in Japan’s ballooning debt by 18 month. When the BOJ expanded monthly bond purchases to as much as 12 trillion yen ($100 billion) on Oct. 31, it cited a risk that weak demand and cheaper oil could delay an end to Japan’s “deflationary mindset.”
Consumer prices excluding fresh food increased an annual 2.9 percent in October slowing from 3 percent in the previous month, official data showed Nov. 28. Stripped of the effect of April’s consumption levy increase, core inflation was 0.9 percent, less than half of the BOJ’s 2 percent target.
“The BOJ used consumer prices as an excuse to add stimulus and continues to hide that it’s monetizing government debt,” said Fujimaki. “But the truth is that Japan will default unless the BOJ continues to buy JGBs even after inflation accelerates beyond its intended target. The failure to push ahead with the planned increase in the consumption levy is a sign of a weak government.”
Opinion Polls
Two years after Abe’s Liberal Democratic Party and coalition partner Komeito defeated the then-ruling Democratic Party of Japan in a landslide, opinion polls show Abe has retained relatively strong support, while backing for the opposition is split among six smaller parties.
The LDP will be the choice of 28 percent of voters for the 475-member lower house, compared with 10.3 percent for the DPJ, according to a Kyodo News poll published Nov. 29. The Japan Innovation party, which was created from the Restoration Party and the Unity Party in September, had 3.3 percent support.
The BOJ’s easing contrasts with the Federal Reserve’s decision in October to end a third round of quantitative easing because of an improved labor market.
‘Helicopter Money’
“The U.S. ended tapering and stopped dropping helicopter money, while Japan is forced to continue to prevent a fiscal default,” Fujimaki said, citing Milton Friedman’s example of executing monetary stimulus by dropping cash from helicopters. “It’s clear the dollar will strengthen,” said Fujimaki, who recommends holding assets denominated in the U.S. currency.
Standard & Poor’s said yesterday its view of Japan hasn’t changed since October, a day after a ratings cut by Moody’s from Aa3 to A1, the fifth highest investment grade. S&P rates Japan at AA-, equivalent to the Aa3 level at Moody’s before the reduction. Fitch Ratings has Japan at A+, the same as the new rating from Moody’s.
A tax increase may be an important measure, but it’s unclear if the benefits would have been as great as anticipated, said Takahira Ogawa, director of sovereign ratings at S&P in Singapore.
Fitch plans to complete a review of the nation’s ratings before the end of the year, Andrew Colquhoun, the company’s head of Asia-Pacific sovereigns said last month, saying that the delay in the tax move is a “significant development” for Japan’s credit rating profile.
‘Chain Reaction’
“The bond market is calm in the aftermath of Moody’s downgrade and a sudden surge in yields is unlikely because the BOJ has been serving as a pain killer,” Hideo Kumano, an economist at Dai-ichi Life Research Institute and former BOJ official, wrote in a note yesterday. “But we should be mindful of the possibility of additional downgrades in a chain reaction.”
Japan’s 10-year benchmark bonds yielded 0.45 percent, the lowest globally after Switzerland. The two-year yield fell below zero for the first time last week reducing borrowing cost for the government with more than 1 quadrillion yen in national debt.
Fujimaki joined the Tokyo office of Morgan Guarantee Trust Co., which merged into JPMorgan Chase & Co., in 1985 and later served as managing director and treasurer, helping to make it reach the most profitable foreign bank in Japan.
After correctly picking the 1990s rally in JGBs, he was hired by Soros Fund Management, once the world’s biggest hedge fund group, in 2000. He stayed less than a year, saying to Bloomberg News at the time that he failed to read the Japanese bond market correctly. He has been predicting an eventual default in Japan since at least 2009.
“The BOJ’s QE will cause bad inflation or hyper inflation,” Fujimaki said.
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