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
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
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,
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
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
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
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
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