The yen has the potential to drop to levels last seen in 1990 on Japan’s deepening monetary policy divergence with the US, Eisuke Sakakibara said.

Nicknamed “Mr Yen” for his ability to influence the currency during his tenure as Japan’s vice finance minister from 1997-1999, Sakakibara said the contrast between a hawkish Federal Reserve and Bank of Japan’s loose monetary policy remains the single biggest driver of the yen’s weakness. Until that gap narrows, the yen is likely to remain under pressure against the world’s reserve currency.

“Market expectation is that toward the end of the year, it will go between 140 and 150 -- so it is quite possible that the yen would reach that level,” Sakakibara, now professor at Tokyo’s Aoyama Gakuin University, said in an interview with Bloomberg Television. “If it goes beyond 150, then I think the Bank of Japan would be somewhat concerned.”

Selling the yen has become a favorite macro trade this year as rising Treasury yields spur investors to ditch Japan’s currency for the higher-yielding greenback. The BOJ has vowed to maintain its easing bias even in the face of the currency’s losses, making it unlikely that the declines will reverse anytime soon.

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The yen tumbled to a two-decade low of 131.35 against the dollar in May and is the worst-performing Group-of-10 currency over the past three months. It last traded near the 150 mark in August 1990.

A Bloomberg survey of strategists expects the yen to end the year at 128, which would be little changed from the level it’s currently trading at. Commerzbank AG and Societe Generale SA are among those that think the currency may drop to 150.

To be sure, not everyone is braced for more losses in the yen. Australia & New Zealand Banking Group Ltd. reasons that falling US stocks will send Treasury yields lower and remove support for the greenback while Shinkin Asset Management Co. reckons the Japanese currency may rebound to around 125 per dollar.

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The yen’s plunge has sparked verbal intervention by Japanese officials to talk up the currency, though that has done little to effectively halt its slide. It is unlikely that the authorities will intervene on a bigger scale because there’s still a reasonable explanation for the currency’s weakness, Sakakibara said.

“This has happened because of the difference of the monetary policy,” he said. “I don’t think that neither the Bank of Japan or Japanese government are worried about the current state of affairs with regards to the exchange rate.”

Source:
courtesy of BLOOMBERG

by Ruth Carson and Yvonne Man

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