Yen forecast to dip when fund sells off local bonds

Prime Minister Shinzo Abe’s inflation drive may get a boost as Nomura Holdings forecasts as much as $200 billion in foreign asset purchases by Japan’s pension funds will weaken the yen.

Nomura predicts a selloff of local bonds by the US$1.3 trillion ($1.5 trillion) Government Pension Investment Fund (GPIF) will depreciate the nation’s currency by about ¥10 against the US dollar over the next 12-18 months, while Mitsubishi UFJ Morgan Stanley Securities estimates an 8 yen slide.

GPIF and other public pension funds will shift an additional ¥12.4 trillion ($122 billion) into foreign bonds and ¥7.5 trillion into overseas stocks, according to Nomura’s “upside scenario”.

The yen’s 18 per cent drop last year helped push inflation to a five-year high in December by increasing the cost of fuel imports. Price growth has since stalled as the yen rebounded and the Bank of Japan refrained from expanding its unprecedented easing.

GPIF’s reshuffling may come as early as this month, when Abe delivers a growth strategy update to Parliament.

“If the GPIF bombshell drops at the right time, dollar-yen could top 110 within this year,” Daisaku Ueno, the Tokyo-based chief currency strategist at Mitsubishi UFJ Morgan Stanley, said. “With Abe pushing hard for change, and the market expecting something, it’s difficult for GPIF to reply with nothing in June.”

Mitsubishi UFJ Morgan Stanley’s official forecast is for the yen to end the year at 108.5 against the dollar, with any effect from GPIF revisions being additional to that.

Nomura predicts it will weaken to 112, including an initial ¥3-4 from GPIF reallocations.

Nomura recommends selling the Japanese currency against a basket of currencies including the US dollar, British pound, Norwegian krona, Mexican peso, and Polish zloty, predicting a return of about 5 per cent over three months, says the bank’s London-based foreign-exchange strategist Yujiro Goto.