The yen is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as US loans for the first time in four months. Rates on 90-day yen loans between banks have fallen the most in 13 years amid record deflation that prompted the Bank of Japan to start a $113-billion lending program last week. By easing demand for private-sector loans, the move helped shrink the gap between US and Japanese London interbank offered rates by two-thirds over the past three months to 0.024 percentage point, the least since August 26, data compiled by Bloomberg show. Investors are betting Libor rates in the US will be higher by June as it recovers from the recession quicker than Japan, Bloomberg data show. The US will expand 2.6 percent in 2010, twice as fast as Japan, median forecasts in Bloomberg surveys of as many as 82 economists show. That may entice traders to shift to yen from dollars to buy assets in higher- interest countries like Australia and Brazil, weakening the yen and shoring up the dollar, as advocated in public statements by both governments. “The dollar’s role as a funding currency is fleeting at best,” said Samarjit Shankar, a foreign-exchange group managing director in Boston at BNY Mellon, the world’s largest custodial bank at more than $20 trillion in assets. “When central banks start raising rates, the yen will be left behind as the primary funding currency.” The yen fell 7.7 percent in the five months after the last time Japanese loans became cheaper, in August 1993. That plunge followed a 45-percent gain in the previous three years, when American rates were mostly lower. Japan’s currency also tended to slide as the Libor gap between the two countries widened during the 13 years that US loans cost more, from 1993 until August 24. The yen depreciated 24 percent in five months in 1995 as that spread expanded by 41 basis points, or 0.41 percentage point. It weakened 13 percent in 2005 as Japan’s borrowing costs became almost 2 percentage points cheaper than in the US This year’s falling US loan costs encouraged investors to sell dollars in carry trades, which seek to profit by using money from low-interest economies to buy assets in higher- yielding countries. Since American rates began dropping in March, the dollar has lost 9.4 percent against the yen, almost twice as much as the US currency had weakened in the prior 10 months. The three-month yen Libor rate fell to 0.28 percent on December 11, from 1.09 percent on October 8 last year, following its biggest 14-month plunge since 1996. The US rate last week was 0.25 after its largest drop since 2002. (Bloomberg)

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