BofA Warns of Weaker, More-Volatile Yen on Japan Political Risks

(Bloomberg) -- Japan’s yen, the worst-performing Group-of-10 currency this year against both the dollar and the euro, may lose value and become more volatile due to a series of domestic catalysts.

Fall elections, a new national endowment to fund university research initially worth 4.5 trillion yen ($41 billion) and any increase in outward mergers and acquisitions will likely put pressure on the yen through the rest of the year, according to Bank of America Japan’s Shusuke Yamada.

As the popularity of Prime Minister Yoshihide Suga declines, investors are eyeing the possibility of a government shakeup after autumn elections, Yamada wrote in a research note Monday. This instability over the next 2-3 months will likely drive volatility, which is currently near historic lows, he said. 

“With political risk at home and a potential announcement of the Fed’s tapering, USD/JPY vol would be supported,” Yamada said. “We expect USD/JPY to rise to 116 by the year-end.”

In addition, the endowment fund launch combined with new outward mergers, which have been suppressed by delta variant risk, could drive Japan’s basic balance of payments negative as early as the fourth quarter, he said.

Since the start of the year, the yen has lost about 6% of its value against the dollar. It has dropped 2.7% against the euro.

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