Japanese Prime Minister Naoto Kan’s wish for a weaker yen is coming true as the strengthening global economy encourages the nation’s investors to send more of their money overseas in search of higher yields.
The yen has depreciated 8.3 percent from its August peak against a basket of nine developed-nation peers, Bloomberg Correlation-Weighted Currency Indexes show. The lower exchange rate marks a turnaround from early 2010 when global investors demanding a refuge from Europe’s sovereign-debt crisis propelled it to a 15-year high versus the dollar.
Declines are being driven by the growing gap between yields on Treasuries and Japanese government bonds and the revival of carry trades, when investors borrow where yields are low, such as in Japan, to buy assets in higher-returning countries. Kan, whose approval rating fell to 17.8 percent last month in a Feb. 17 Jiji Press survey, may benefit from a weaker yen that bolsters profits at exporters such as Toyota Motor Corp.
“Investors will be seeking higher yields overseas, given yields are so low in Japan,” said Kei Katayama, leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo, which manages $54.3 billion in assets. “Developing nations are gaining momentum, and this trend won’t change easily.”
The yen may weaken to 86 per dollar by the end of the second quarter and 90 by the end of the year, according a Bloomberg News survey of 40 forecasters. The currency gained 0.3 percent to 83.18 in the week ended Feb. 18.
Treasury Yields
The shift out of the yen comes as Treasury yields rise on speculation the U.S. economy and inflation are accelerating, boosting demand for assets linked to growth. Gross domestic product will expand 3.2 percent this year, compared with 2.9 percent in 2010, while the 10-year note yield may rise to 3.94 percent from 3.29 on Dec. 31, according to Bloomberg New surveys.
In Japan, 10-year yields are forecast to rise this year to 1.24 percent from 1.13 percent on Dec. 31 as the nation’s economy grows 1.4 percent, according to Bloomberg News surveys.
Investment flows into Japanese mutual funds that focus on offshore assets rose 14 percent to 624.6 billion yen ($7.51 billion) in January from a year earlier, according to the Investment Trust Association. The amount moving into these funds doubled to 6 trillion yen in 2010 from the previous year.
Last year, the carry trade of borrowing in dollars and selling the greenback to buy the currencies of Australia, Norway, New Zealand and Brazil returned 11.5 percent, according to data compiled by Bloomberg. That compares with a loss of 2.8 percent using the yen as a so-called funding currency.
Carry Trade Reversal
The results have reversed in 2011, with carry trades using the yen gaining 23.8 percent, compared with 2.8 percent in dollar-funded trades.
“Investors are increasingly buying higher-yielding assets, as the worldwide economic recovery is stabilizing more now,” said Morio Okayasu, chief analyst in Tokyo at FOREX.com Japan Co., a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. “Yen-carry trades are getting popular, so the bias is for the Japanese currency to be sold.”
Smaller price swings are also boosting the carry trade. The JPMorgan Chase & Co. implied volatility index for seven major currencies fell to 10.18 last week, the lowest since August 2008. Higher volatility undermines the strategy by making the trade less predictable.
Currency Intervention
The yen reached 80.22 against the dollar on Nov. 1, the strongest level since April 1995. Its 15 percent appreciation last year led Kan to express concern about the currency’s strength and prompted the government to sell 2 trillion yen in the nation’s first intervention in the foreign-exchange market since 2004. Governments and central banks intervene by selling or buying currencies to influence prices.
As a stronger yen made exports from Japan less competitive, Yokohama, Japan-based Nissan Motor Co., Japan’s second-largest carmaker, announced in July it would spend $600 million to upgrade two Mexican auto plants and increase U.S. production.
When the yen then weakened, exports, which make up about 16 percent of the nation’s economy, rose. December exports rose 13 percent from a year earlier, after a 9.1 percent gain in November, the Finance Ministry reported Jan. 26.
Toyota City, Japan-based Toyota, the world’s largest carmaker, raised its full-year profit forecast by 40 percent on Feb. 8, as sales in Asia and other emerging markets exceeded the company’s estimates. Net income may more than double to 490 billion yen for the 12 months ending March 31, from 209 billion yen a year ago and its November estimate of 350 billion yen.
“The political leadership will be ecstatic if we see a weaker yen, since it will help boost exports and help make Japanese goods more competitive,” said Paresh Upadhyaya, head of Americas G-10 currency strategy in New York at Bank of America Corp., the top euro-yen forecaster in the six quarters ended Dec. 31 based on data compiled by Bloomberg.
Yen weakness may be tempered by the nation’s current account surplus. The broadest measure of trade widened 30.5 percent in December from a year earlier to 1.195 trillion yen, the Finance Ministry said Feb. 8.
“If you run a current account surplus, you’re creating more demand for your currency than there is relative to supply,” said Robert Lynch, head of foreign exchange strategy for HSBC Holdings Plc in New York.
While the yield difference between U.S. and Japanese two- year securities expanded to 62 basis points, or 0.62 percentage point, on Feb. 8, the most since June, Lynch said it’s still narrow when compared with pre-financial crisis spreads as wide as 447 basis points in July 2006. HSBC forecasts the yen will strengthen to 80 per dollar by year-end.
Benchmark Rates
Bank of Japan Governor Masaaki Shirakawa kept the benchmark interest rate between zero and 0.1 percent at the last monetary policy meeting on Feb. 15, where it has been since December 2008. In a Bloomberg News survey last month, 12 of 15 economists predicted the Bank of Japan won’t raise the benchmark rate until 2013 at the earliest, two said it will increase next year and one predicted no change until 2014.
The Federal Reserve will raise rates to 0.5 percent by year-end, according to a Bloomberg News survey. Fed Chairman Ben S. Bernanke and his colleagues at a Jan. 26 meeting voted to keep its rate target in a range of zero to 0.25 percent, where it’s been since December 2008. The Fed is promoting growth after the credit crisis that led to an 18-month contraction that was the longest since the 43-month slump during the Great Depression, according to the National Bureau of Economic Research.
‘Quite Skeptical’
“Japanese investors have been quite skeptical about the U.S. recovery,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “Sentiment has shifted so dramatically.”
The yen has declined against 15 of its 16 most-traded counterparts this year except for the South African rand. It may depreciate to above 100 per dollar this year and trade about 95 yen at year-end, said Kenichiro Ikezawa, a fund manager in Tokyo at Daiwa SB.
For the first time since June, futures traders are betting on a drop in the yen versus the dollar, according to the Washington-based Commodity Futures Trading Commission. The difference in the number of wagers by hedge funds and other large speculators on a decline compared with those on a gain -- so-called net shorts -- was 18,548 as of Feb. 15, compared with net longs of 36,731 a week earlier.
“Dollar-yen seems to have bottomed out at last,” Ikezawa said. “The U.S. won’t add to monetary easing from here, and Japan will inevitably lag behind in rate increases.”
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
