Yen Gains as Japan Sinks Shows Current Account Surplus No Boon
Oct. 18 (Bloomberg) -- Japan's success in building an economy that supplies the world with everything from cars to electronics is now undermining its own efforts to keep the yen from rising at a time when few countries want a strong currency.
The yen has gained 83 percent against a basket of the most- traded currencies since the start of 1986, including a 12 percent gain in 2010, as the nation posted a surplus every year in its current account, the broadest measure of trade. Unlike the U.S. or the 16-nation euro region, Japan doesn't rely on foreign capital to finance its budget deficit.
As a result, money is flowing into Japan from traders concerned about indebted nations' funding as growth in the global economy slows. Bets the currency will strengthen were about the highest this year, even after the Bank of Japan sold 2 trillion yen ($25 billion) last month in its first intervention since 2004. The central bank and Ministry of Finance say Japan needs a weaker currency to bolster exports.
"Any attempts to weaken the yen will be futile," said Richard Franulovich, a senior foreign-exchange strategist at Westpac Banking Corp. in New York. "Intervention, when it fights against the underlying fundamentals of a currency, is doomed to fail."
Japan has fallen in and out of recessions since the early- 1990s, when its real estate market collapsed. Economic growth may slow to 1.4 percent in 2011 from 3.05 percent this year, the median estimate of 11 economists surveyed by Bloomberg shows.
Bold Action
Prime Minister Naoto Kan said in parliament on Oct. 15 that he was "very concerned" about the yen's rise, while Finance Minister Yoshihiko Noda repeated the same day that he's ready to take "bold" action in markets.
Since intervening in the foreign-exchange market on Sept. 15, the Bank of Japan cut its main interest rate to as low as zero and set up a fund to buy assets such as government bonds.
None of that has done any good, as the yen continued to strengthen, and an International Monetary Fund meeting in Washington last week failed to produce an agreement on foreign exchange coordination.
Japan's currency appreciated 0.6 percent last week, reaching 80.88 to the dollar on Oct. 15, a 15-year high.
Japan's current-account balance represented about 2.8 percent of its economy last year, compared with minus 2.68 percent in the U.S. and negative 2.49 percent for the euro zone.
Trade Surplus
"They run a trade surplus and therefore it's something that implies a greater demand for yen," said Robert Lynch, head of currency strategy at HSBC Holdings Plc in New York.
Analysts have raised their year-end forecasts for the yen since the Sept. 15 intervention, which sparked the biggest drop in 22 months that day.
The yen will end 2010 at 85 against the dollar, compared with a prediction of 87.5 yen a day before the Bank of Japan acted, according to the median of 36 forecasts compiled by Bloomberg. On Oct. 15, Nomura Holdings Inc. raised its estimate for the yen to 85 against the dollar this fiscal year from 89, and to 81 in the following two years from 88.
Trading in options at the end of last week suggested there's a 71 percent chance the yen will strengthen beyond the record 79.75 to the dollar by year-end. It's up 11.7 percent this year, the best performer in a basket of 10 currencies, according to Bloomberg Correlation-Weighted Indexes.
Yen Bets
Japan's currency is also rising as domestic investors keep more of their money at home as record-low bond yields in the U.S. limit returns from overseas.
The low end of the Bank of Japan's main rate is now the same as the Federal Reserve's. The difference in yield between two-year U.S. Treasury notes and similar-maturity Japanese securities narrowed to 0.22 percentage point on Oct. 8 from a high this year of 0.99 percentage point reached on April 5.
"Because global interest rates have converged towards those in Japan to a large extent in recent years, there has been less incentive for Japanese investors to move capital abroad," Lynch said.
Hedge funds and other large speculators' net wagers that the yen will rise against the dollar stood at 48,285 contracts on Oct. 12, data from the Commodity Futures Trading Commission in Washington on Oct.15 showed. In May, there were a net 65,612 contracts on a decline.
Carry Trade
The 120-day correlation between dollar-yen and the gap between U.S. and Japanese two-year note yields was as high as 0.69 this year, while the relationship between euro-dollar and U.S. and German rates hasn't been above 0.27 in the period. A reading of 1 means the two measures move in lock step.
The yen is also gaining as Federal Reserve Chairman Ben S. Bernanke prepares to print more money to boost the U.S. economy. The rally may end, causing the yen to drop "substantially," if the Fed disappoints investors by purchasing fewer bonds than forecast, said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp., the world's biggest custody bank.
The Fed will buy $1 trillion of Treasuries in the next year, commencing at its next policy meeting, Bank of America Merrill Lynch said in an Oct. 13 report. UBS AG sees purchases of $35 billion to $65 billion per month, while Goldman Sachs Group Inc. expects about $500 billion through about the middle of 2011, according to reports this month.
Success by the Fed in boosting U.S. growth should also lead to a stronger dollar, said Pierre Lequeux, London-based head of currency management at Aviva Investors, a unit of Aviva Plc, which manages about $371 billion.
Weaker Yen Predicted
"In six months time, people will start to talk more about an exit, rather than how much more they are going to do, which is what the market is focusing on at the moment," said Lequeux. "That will have an implication for interest-rate curves and can play for a stronger dollar-yen."
Lequeux predicts the yen will depreciate to between 90 and 100 to the dollar next year.
Should the BOJ intervene again, it will probably act alone after finance chiefs at the IMF meeting earlier this month failed to eliminate currency tensions. Treasury Secretary Timothy F. Geithner has said China is keeping the yuan undervalued, while low U.S. rates were criticized by officials including Brazil central bank President Henrique Meirelles for flooding emerging markets with cash.
'Coordinated Efforts'
"The market doesn't believe the BOJ has stepped away, but in the current environment it's very difficult for them to prevent the yen strengthening," said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. "They can slow its advance, but for it to succeed you need coordinated efforts and nothing of that sort came out of the IMF meetings."
Strength in the yen is hurting the Japanese economy as the nation tries to cope with paying for an aging population.
Japanese exports increased 15.8 percent in August from a year earlier, the slowest pace since December, the Ministry of Finance said last month. Growth in the second quarter slowed to a 1.5 percent annual rate from 5 percent in the first quarter.
Almost 23 percent of Japan's 126 million people will be older than 65 at the end next year, the highest proportion among Group of Seven nations, according to data compiled by Bloomberg. That compares with 13 percent in the U.S. and 20 percent in Germany.
"The convergence of the U.S. and Europe to Japan is the reason for yen strength," said David Woo, head of global rates and currency research at Bank of America Merrill Lynch in New York. "I don't hold that much hope for the U.S. and Europe to come storming back as the aging population issue kicks in."
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net Rocky Swift at rswift5@bloomberg.net
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