Hatoyama Yen Repels Goldman Seeing 8% Slide on Growth
Sept. 21 (Bloomberg) -- Hirohisa Fujii, Japan’s new financeminister, says he doesn’t support a weak yen. The world’sbiggest banks say that’s just what he may get.
While the yen gained against all but one of the 16 most-actively traded currencies since early August as the DemocraticParty of Japan became the likely winner in national elections,forecasters say it will decline 5.2 percent against the dollarand 0.7 percent versus the euro by year-end. The economy is tooweak to support a stronger rate, based on the median of 40estimates in a Bloomberg survey.
Japan will be the only Group-of-10 nation that won’t raiseborrowing costs in 2010, keeping its benchmark interest rate ata record low 0.1 percent, the survey shows. The economy willexpand 0.8 percent next year after contracting 6 percent in2009, according to median forecasts, putting assets in theworld’s second-biggest economy at a disadvantage to those incountries with higher borrowing costs.
“Everyone is seemingly buying the yen, which I think isridiculous,” said Jim O’Neill, head of global economic researchat Goldman Sachs Group Inc. in London. “The true underlyingfundamentals for the yen in my book have deterioratedsignificantly.”
New York-based Goldman Sachs, which earned more than $100million from trading for a record 46 days last quarter, predictsthe yen will weaken to 98 per dollar and 142 per euro by the endof the year, from 92.23 and 135.25 as of 7:09 a.m. in New Yorktoday. Bank of America Corp., the biggest U.S. bank, and HSBCHoldings Plc, the largest in Europe, are even more bearish.
Yen’s Rally
The yen rallied 6.6 percent against the dollar and 3.3percent compared with the euro as the Democratic Party of Japan,led by Yukio Hatoyama, 62, gained in the polls on the way to anelection victory in the lower house of Parliament on Aug. 30that broke 55 years of almost uninterrupted rule for the LiberalDemocratic Party. Only the South African rand has risen more.
During the campaign, the DPJ said a stronger yen will boosthousehold spending by making imported goods less expensive.That’s in contrast to the former administration’s focus onpublic works spending and keeping the yen weak to helpexporters.
Fujii, 77, reiterated that message on Sept. 16, the day theDPJ officially took over, saying he doesn’t support a “weakyen.” The comments drove the currency to 90.13 per dollar, itsstrongest level since February. The following day, he said itwas an “absurd idea” that a weak yen is better for exports.
Suffering Exporters
Shares of Aichi-based automaker Toyota Motor Corp., whichmakes about 75 percent of its revenue outside of Japan, dropped1.1 percent on the day of Fujii’s comments even as the Nikkei225 Index added 0.5 percent.
In a Cabinet Office survey released April 22, exporterssaid they can remain profitable as long as the yen trades at97.33 per dollar or weaker. A rising currency hurts exporters bymaking their goods more expensive to foreign buyers and reducingthe value of profits earned abroad. Exports account for 12percent of Japan’s economy, compared with 6 percent in the U.S.
Tokyo-based Canon Inc., the world’s biggest maker of officeequipment, said in its latest financial report every 1 yenchange against the dollar would alter its second-half operatingprofit by 4.2 billion yen ($46 million).
“Fujii’s words will come to haunt him,” said RichardBenson, who oversees $14 billion of currency funds at MillenniumAsset Management in London. “The DPJ’s strong-yen policy willhurt the Japanese stock market, leading domestic investorsoverseas in search of returns, selling the yen in the process.”
Exports Plunge
Exports plunged at an unprecedented 26 percent rate in thethree months ended March 31, contributing to the economy’srecord 15.2 percent contraction in the quarter. The public debtis almost 200 percent of the economy, compared with about 48percent in the U.S., according to data compiled by Bloomberg.
The surplus in Japan’s current account, the broadestmeasure of trade because it includes investment, is shrinkingrelative to the size of the economy. The measure will fall to2.1 percent of gross domestic product this year, based on medianestimates in Bloomberg economist surveys, from 4.8 percent in2007 and 3.2 percent in 2008. The household savings rate willdrop to 2 percent this year from 3.3 percent in 2008 and morethan 10 percent a decade ago, Goldman Sachs says.
Strength ‘Illusion’
“Yen strength is an illusion with short-term investors,”said Tomoko Fujii, Tokyo-based senior currency strategist atBank of America Securities-Merrill Lynch. The Charlotte, NorthCarolina-based firm expects the yen to weaken to 105 per dollarand to 158 per euro by Dec. 31. “They’re jumping to theconclusion that the government change will boost the yen, butthat’s not the case because there’s no benefit in killing offthe exporters,” she said.
Deutsche Bank AG, the world’s biggest currency trader, saysthe yen will rally to 80 to the dollar by year-end. U.S.interest rates near zero will encourage investors to financepurchases of higher-yielding assets with the U.S. currency atthe same time that the improving world economy boosts demand forJapan’s exports.
“Yen is back,” Bilal Hafeez, Deutsche Bank’s London-basedhead of foreign-exchange strategy wrote in a report to clientson Sept. 17. “The yen may end up being the biggest winneragainst the dollar.”
The three-month dollar London interbank offered rate, orLibor, fell below the comparable Japanese rate last month forthe first time since April 1993. Dollar Libor was 0.29 percenton Sept. 18, while yen Libor was 0.35 percent, according to theBritish Bankers’ Association in London.
Options Bets
Options traders are betting the yen will rise against allother Group of 10 currencies in the next three months. The costof contracts used to bet the yen will appreciate versus thedollar are the most expensive relative to those betting on adecline since July 30, so-called 25-Delta Risk Reversals show.
Japanese investors are showing less confidence in theircurrency. They bought the most foreign bonds in four years lastweek, purchasing a net 1.66 trillion yen in the period to Sept.12, according to Ministry of Finance figures released Sept. 17.
The drop in short-term rates reduces the expenses ofhedging purchases of foreign bonds, said Keiko Onogi, a Tokyo-based debt strategist at Daiwa Securities SMBC Co., a unit ofJapan’s second-largest brokerage.
Exchange Rates
Individual investors in Japan added to foreign currencymutual funds every month since January, according to InvestmentTrust Association data. Assets in the funds reached 26.9trillion yen in August, the most since September and up from20.7 trillion yen in January.
Bank of Japan Governor Masaaki Shirakawa told reporters inTokyo on Sept. 17 that while stimulus measures, including buying$20 billion of government debt a month, have helped the economy,policy makers are “not confident about the strength” ofconsumer demand “after those effects fade.”
The central bank is monitoring the exchange rate, which iscontributing to a drop in inflation, he said. Consumer pricesexcluding food plunged at a record 2.2 percent pace in Julywhile the jobless rate hit an unprecedented 5.7 percent the samemonth, government reports showed.
“The yen is inappropriately strong,” said David Bloom,global head of foreign-exchange strategy in London at HSBC. Thegovernment “will mind given the massively deflationary threatJapan is still facing,” he said.
HSBC, the biggest European bank, is telling its clientsthat the currency will weaken to 105 per dollar and 158 per euroby March 31.
Intervention History
Japanese officials have responded to yen strength in thepast by intervening in currency markets, including when Fujiiwas finance minister between 1993 and 1994. Authorities sold thecurrency on all four of the last five times since 1995 when theyen approached the 100-per-dollar mark to support exporters.
The Bank of Japan, on behalf of the Ministry of Finance,sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen inthe first quarter of 2004, when it traded as high as 103.42 perdollar. The yen declined to an eight-month low of 114.88 versusthe dollar in May that year.
“I suspect the people at the Bank of Japan and theMinistry of Finance will start briefing Fujii on what he shouldand shouldn’t say,” said Neil MacKinnon, global macrostrategist in London at VTB Capital Plc, an investment bank.“Incoming policy makers often make a public view on a currency,only for it to be clarified, reviewed or withdrawn once theiradvisers have a word with them.”
To contact the reporters on this story:Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net;Matthew Brown in London at mbrown42@bloomberg.net
Last Updated: September 21, 2009 07:13 EDTSource: Bloomberg
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