The yen may weaken to “infinity” versus the dollar as central bank policies in Japan and the U.S. diverge, according to Axel Merk of Merk Investments LLC.
The Bank of Japan’s unprecedented bond-buying program designed to reach an inflation target of 2 percent in two years, combined with the Federal Reserve’s forecast trimming of monthly bond purchases, is putting pressure on the yen, said Merk, who oversees about $635 million of currencies as founder and president of Palo Alto, California-based Merk Investments. He is also a Moneynews Insider.
“The biggest fear that I have is that some of the policies we have are working, be it in U.S. or Japan,” Merk said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee. “That means that yields are going to spike; it means that we cannot afford government deficits. In Japan, it’s very clear that the Bank of Japan is going to jump in to put a lid on that, and there the yen has to cave in.”
The objective of Merk’s $376 million Hard Currency Fund is to protect against the depreciation of the U.S. dollar relative to other currencies. The fund has gained 0.6 percent in the past month, outperforming 84 percent of its peers, according to data compiled by Bloomberg.
Japan’s currency rose 0.7 percent to 99.16 yen in New York on Thursday, after Wednesday touching 100.61, its weakest level since July 22. The yen has declined 12 percent versus the dollar this year, making it the second-worst performer among the greenback’s 16 most-traded counterparts.
The yield differential between U.S. and Japanese government securities reached its widest in almost two and a half years as respective monetary policies diverge. Treasurys due in 10 years yielded 2.22 percent more than similar maturity Japanese sovereign debt on Sept. 10, the biggest premium since April 2011, according to Bloomberg data.
Japanese Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda have implemented a bond-buying program to help combat years of deflation. Abe will announce Japan will raise the country’s sales tax to 8 percent from 5 percent in April as planned, the Yomiuri newspaper reported without saying where it got the information. Abe will detail a 5 trillion-yen stimulus package along with the tax increase, the paper said.
“They’re going to spend, they’re going to tax, they’re going to print money,” Merk said. “It’s going to feel great for a while, but that cannot have a good ending.”
The Fed this month will taper its monthly bond purchases to $75 billion from the current $85 billion pace, according to the median estimate of 34 economists surveyed Sept. 6 by Bloomberg News.
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