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     Oct 3, 2008
Yen a winner from financial woes
By Kosuke Takahashi

TOKYO - Faced with a gloomy outlook for the faltering United States financial system and serious worries about a global slowdown, the Japanese yen is looking to be one of the winners in the turmoil as investors increasingly seek to reduce risk.

Global money managers and hedge funds as well as Japanese mom-and-pop investors are unwinding yen carry trades, which under less volatile financial times allow traders to capitalize on Japan's ultra-low interest rates to buy higher-yielding assets elsewhere. Now, overseas assets bought through loans in the Japanese currency are being sold everywhere and funds repatriated to Japan and elsewhere.

The yen has risen against all other major currencies such as the US dollar, the euro and the Australian dollar this year, especially


over the past two months, as the financial turmoil in the US has played out, pushing down stocks globally.

"With investors being risk averse, the yen will remain firm," said Masaki Fukui, senior market economist in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest financial group by market value. "The financial turmoil is adversely affecting the US economic fundamentals, and vice versa. This is just a vicious circle. In the short term, the dollar will remain strong because of tight credit. But the yen will gradually appreciate furthermore across the board, if not steeply."

The yen rose to 105.35 per dollar at 6pm in Tokyo on Thursday, up from 108.49 in New York on September 2. It also gained to 149.59 a euro from 157.68 a month ago. Japan�s currency may rise to 90 per US dollar early next year, Fukui predicted.

In carry trades, investors borrow funds in countries with low interest rates to buy assets where returns are higher. Japan's 0.5% target lending rate is the lowest among major economies, making the yen a popular currency to fund the purchase of higher-yielding assets. It compares with 2% in the US, 4.25% in Europe, 5% in the UK, 7% in Australia and 7.5% in New Zealand. The risk is that adverse currency moves can erase profits. Those investors who conducted carry trades by selling the yen against major currencies such as the British pound and the New Zealand dollar have suffered losses so far this year as the yen has strengthened.
In a sense, the markets are now facing the unwinding of once-popular yen carry trades and also of dollar carry trades, which had gained in volume as the benchmark Fed Funds rate in the US was cut in a series of steps to 2% from 5.25% in August 2007, becoming the second-lowest target rate among major economies.
Short-term dollar buying
Looking ahead, "The yen will strengthen against yen-crosses such as the euro," said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. "But against the US dollar, it may not be the case in the short term. The US dollar will be supported possibly for the rest of this year as US financial firms are selling off their assets to overseas investors. This is bringing about dollar-buying on an actual commercial basis. The Japanese financial banks have sufficient cash to buy."

Mitsubishi UFJ Financial Group, Japan's largest financial group by market value, said on Monday it had finalized an agreement with Morgan Stanley to take a 21% interest in the US financial services firm for US$9 billion. Goldman Sachs, once the biggest US investment bank and now, like Morgan, a bank holding company, is seeking to acquire up to $50 billion in assets from ailing US lenders as part of its push into commercial banking, the Financial Times reported on September 28, citing Goldman executives.

"It should be hard for Goldman to buy those assets by itself," Saito said. "The firm will manage money from abroad. This sort of investment into the US will support the dollar in the near term."

Japan's yen may move between 100 and 105 per dollar, and 140 and 150 against the euro for the rest of this year, Saito said.

Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd, holds similar views. He told Asia Times Online that with the liquidity crunch overwhelming short-term inter-bank trading, the dollar is finding support, but once the markets starts to focus on US economic fundamentals as the financial turmoil calms down, the dollar will be sold. The US currency may fall to 103 yen by year-end and 100 yen by March 31, he predicted.

Faltering Asian economies
Most Japanese economists and analysts such as Mizuho's Fukui believe Asian economies will be caught up in a global economic downturn, rejecting the notion that emerging economies had to some extent decoupled from those of the US and Europe.

Japan in August recorded its first trade deficit in 26 years, excluding last January - a month in which Japanese exports often fall sharply because of New Year holidays, the government said last Thursday. Exports to the US fell at the fastest rate on record. Japan's Tankan index of confidence among Japan's large manufacturers turned negative for the first time in five years and three months, the Bank of Japan said on Wednesday.

Meanwhile, South Korea's current account deficit reached a record high in August, as its export growth slowed while expensive global oil inflated the country's import bills, the government said on Tuesday.

In Thailand, Federation of Thai Industries chairman Santi Vilassakdanont said on Tuesday that export orders would decline next year because people in the country's leading markets would cut spending on luxury goods under the effects of the subprime crisis, the Bangkok Post reported.

Asian stocks plunged on Tuesday, with Japan's key 225-issue Nikkei Stock Average closing at a three-year low of 11,259.86, following the worst single-day drop in two decades in New York after the rejection by US lawmakers of a $700 billion bank rescue plan deepened concern more economies will slide into a recession.

"Asian economies are swimming in tougher and rougher seas," Mizuho's Fukui said. "With the global economy shrinking, investors are pulling money out of Asian economies, pushing down regional stocks."

Money into bonds, but not to Treasuries
As the financial crisis continues, Asian firms may pull back on new investments in US Treasuries because America will continue to face financial instability and deteriorating economic fundamentals, even though bonds are usually a safe haven, said Societe Generale's Saito.

"Asian institutional investors may hold off from buying US Treasuries amid concerns ballooning US budget deficits will bring the downgrade of them, and they would rather buy Japanese government bonds, for instance," Saito said. "But I do not think Asian governments and central banks such as China will do the same. If they did, that would be a life-or-death matter for the US and the world's financial system."

Kosuke Takahashi is a former staff writer at the Asahi Shimbun and is currently a freelance correspondent based in Tokyo. He can be contacted at [email protected]

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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