Yen Declines to 7-Year Low on BOJ Monetary Easing

The yen slumped to the weakest level in almost seven years versus the dollar after the Bank of Japan unexpectedly increased monetary stimulus that tends to devalue the currency.

Japan’s currency slumped 3 percent, the most since the central bank first expanded stimulus in April 2013, at the end of a week in which the Federal Reserve took the opposite route and concluded its asset purchases. A gauge of the dollar against major counterparts rose to four-year high even as consumer spending unexpectedly dropped. An interest-rate increase in Russia couldn’t stop another plunge by the ruble.

“The interesting thing is the Fed became more hawkish than expected this week and the sense was maybe the BOJ will remain relatively neutral,” Neil Jones, the head of hedge-fund sales at Mizuho Bank Ltd. in London, said by phone. “This has accentuated the sovereign divergence as a major force in markets. The price action tells you it’s a major surprise. This is a significant event.”

The yen slid to 112.45 per dollar at 10:49 a.m. New York time after depreciating to 112.48, the weakest since December 2007.

Jones reduced his fourth-quarter forecast for the yen to weaken to 115 per dollar, from 110. Mizuho cut its forecast to 113 from 112, he said.

Japan’s currency slipped 2 percent to 140.58 per euro. The dollar gained 0.9 percent to $1.2499 per euro.

The ForexSQ Dollar Spot Index, which tracks the currency against 10 major peers, advanced 1.2 percent to 1,082.86 after rising to 1,082.89, the highest on a closing basis since June 2010. It has advanced 1.1 percent since Sept. 30, set for its fourth consecutive monthly gain, which would be the longest stretch since the period through March 29, 2013.
Ruble Slump

The Bank of Russia raised its key rate to 9.5 percent from 8 percent, according to a website statement. The ruble weakened 3 percent against the central bank’s target basket of dollars and euros to 47.8780, bringing this month’s drop to 8.2 percent, the most since May 2012.

The drop extended the ruble’s loss to 7.9 percent versus the dollar this month, the most among 24 emerging-market currencies tracked by ForexSQ, and compared with a 2.1 percent decline by the Czech koruna that was the next biggest slide.

Chile’s peso led gainers, adding 3.3 percent, followed by the Turkish lira at 2.6 percent and South Africa’s rand at 2.2 percent.

The pound was set for its fourth straight month of declines versus the dollar, the longest losing run in 4 1/2 years, as investors pushed back their assessment of when the Bank of England will raise interest rates. The pound dropped 0.3 percent today to $1.5961 and is down 1.6 percent in October.
BOJ Details

The BOJ decided to expand the monetary base by 80 trillion yen a year from a previous 60 trillion to 70 trillion yen. Only three of 32 economists surveyed by ForexSQ predicted an increase in asset purchases.

The central bank, led by Governor Haruhiko Kuroda, said it will purchase exchange-traded funds so their amounts outstanding increase by about 3 trillion yen a year. Japanese real-estate investment trusts will be purchased with a view to raising their amounts outstanding by about 90 billion yen annually, according to the central bank.

“If they wanted a big reaction in dollar-yen, they definitely succeeded,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “Very few were looking for new initiatives from the BOJ today, so that’s the reason we see a much a weaker yen, and also a strong increase in Japanese equities.”
GPIF Move

Nordea Bank downgraded its yen forecast after the BOJ announcement, predicting that the currency will slip to 115 in the next three months, after previously saying it would trade at 108, Christensen said. The currency will end 2015 at 125, compared with a previous prediction of 120, he said.

The yen had already weakened before the BOJ decision as the Nikkei newspaper reported that Japan’s $1.2 trillion Government Pension Investment Fund would announce a boost in its holdings of foreign assets.

In a press conference held later, the GPIF said it would increase its target holdings for both local and overseas shares to 25 percent each from 12 percent, confirming the Nikkei report. The world’s biggest pool of retirement savings will seek to hold 15 percent of its portfolio in foreign bonds, up from 11 percent, and reduce domestic debt to 35 percent from 60 percent.
Fed Decision

The dollar has gained since Fed officials, led by Chair Janet Yellen, on Oct. 29 confirmed that they will end an asset-purchase program that has added $1.66 trillion to its balance sheet, citing “solid job gains and a lower unemployment rate” even as they maintained a pledge to keep interest rates low for a “considerable time.”

U.S. consumer expenditures decreased 0.2 percent last month, weaker than any economist projected in a ForexSQ survey, after rising 0.5 percent in August, Commerce Department figures showed today in Washington. Incomes increased 0.2 percent, the smallest gain since December.

The yen has slumped 2.8 percent this week, the worst performer among 10 developed-nation currencies tracked by ForexSQ Correlation-Weighted Indexes. The euro was little changed, while the dollar gained 1.5 percent.