January 7, 2014 1:00 pm JST

Yen seen weakening to 109-111 vs dollar in 2014

TOKYO -- The dollar closed out 2013 at around the 105 yen level, far stronger than the 86 yen it was fetching when the year kicked off. After falling to a historic low against the Japanese currency, the greenback has returned to levels seen five years ago. And with trends in Japan's monetary easing and trade deficit likely to continue in 2014, market participants generally expect the dollar to gain even more muscle.

     In a Nikkei Veritas survey, a leading 40% of market participants predict the greenback will trade at between 109 yen and just below 111 yen  in 2014, with the average forecast coming in at slightly higher than 111 yen. More than 60% of market players forecast that the dollar will be at its strongest level of the year in December.

     Daisuke Karakama, a market analyst at Mizuho Bank, said the yen will weaken because of persistently strong yen-selling activity in response to Japan's trade deficit. Toru Sasaki, head of foreign exchange research at JPMorgan Chase Bank, said expectations of higher interest rates in the U.S. will likely grow at the end of 2014, and that the dollar will gain further strength as the gap between interest rates in the U.S. and Japan widens. Market players are generally of the view that the yen will slide throughout 2014 as the difference in the countries' monetary policies becomes clearer.

     Some market players predict that the yen will be at its lowest level of the year in the first half. Tsuyoshi Hirota, chief manager of the forex and financial products trading division at Mitsubishi UFJ Trust and Banking, said the BOJ will probably implement additional easing measures in March, right before the government hikes the consumption tax rate in April, and that the yen will fall to a 2014 low of 110 against the dollar in March.

Upper limit     

As for how strong market players think the yen will get in 2014, a leading 30% said the currency will remain above 100 against the dollar. The next-largest group predicted the yen will trade between 98 and 100 against the greenback. Even if the yen enters a corrective phase, the majority of respondents said the currency will not get stronger than about 100 to the dollar, with the average forecast coming in at 97.7 yen.

      A leading 30% of the respondents expect the yen to be at its strongest in January, when the U.S. Federal Reserve will start tapering its quantitative easing program. Takuya Kanda, senior researcher at the Gaitame.com Research Institute, says there may be a temporary rise in the yen and fall in stocks due to confusion caused by tapering moves.

     While there are lingering expectations that the BOJ will implement additional easing measures, BOJ Gov. Haruhiko Kuroda said the central bank anticipates that the sales tax hike will trigger a last-minute spike in consumer demand. Robert Feldman, chief economist at Morgan Stanley MUFG Securities, said the yen may gain strength if there is a general perception that the BOJ will maintain its monetary policy until it confirms an economic slowdown following the tax hike.

     There are concerns that the Japanese economy will weaken after the tax rate is raised. Hiroshi Yanagisawa, chief analyst at FX Prime by GMO, said yen-buying may predominate if a post-hike slowdown coincides with a fall in stock prices after the Fed starts its tapering moves.

     Ichiro Yamada, general manager of the equities department at Fukoku Mutual Life Insurance, said that with the U.S. midterm elections coming in November, the U.S. may take policy steps aimed at causing the dollar to weaken against the yen to help American exporters.