Nov. 12 (Bloomberg) -- The yen may strengthen to a 14-year high, pushing the dollar below 85 yen by the end of March, as the global economy heads for a ’’second bottom,’’ according to Mitsubishi UFJ Trust & Banking Corp.

“I hold a very skeptical view on the economic outlook,” Toshihiko Sakai, manager of foreign exchange and financial products trading at the bank, said in an interview with Bloomberg News yesterday. “The yen is likely to climb due to risk aversion.”

Signs of a recovery, including China’s accelerating growth, stem from a flood of stimulus spending that isn’t sustainable, Sakai said. China is piling up commodities, raising raw materials prices and bolstering nations such as Australia, he said. China is the biggest trading partner for Australia, the world’s largest shipper of iron ore and coal.

Australia’s dollar surged 38 percent against the yen in the past year, lagging behind only the Seychelles rupee among the 171 currencies tracked by Bloomberg. The Aussie rose today to a 15-month high after employers unexpectedly added jobs, led by companies in Western Australia state, which supplies a third of the world’s iron ore exports.

“I think speculative moves are pushing up commodity prices,” Sakai said. “China’s state-run firms may be accumulating a lot of commodities for investment purposes, exceeding what actual demand requires.”

Carry Risks

A collapse in raw materials prices would trigger risk aversion and prompt investors to unwind so-called yen carry trades, when they borrow in yen and then sell those funds in exchange for higher-yielding currencies.

“Higher-yielding currencies will be sold resulting in yen strengthening,” Sakai said. “Currencies such as Australia’s dollar are closely linked to commodity markets.”

Benchmark interest rates are 0.1 percent in Japan, 3.5 percent in Australia and 1 percent in the euro zone, making the yen a target for carry trades.

Borrowing in yen to buy Australian assets offered a return of 42 percent this year, second only to the 46 percent yield offered by the South African rand, according to data compiled by Bloomberg.

China’s Data

China’s factory output rose 16.1 percent and retail sales advanced 16.2 percent in October from a year earlier, the statistics bureau reported yesterday in Beijing.

New loans in China declined to 253.0 billion yuan ($37 billion) last month from 516.7 billion yuan in September, the Beijing-based People’s Bank of China reported yesterday.

Sakai said China’s growth isn’t enough to counter the economic slump in the U.S., the world’s biggest economy, where he expects the unemployment rate to climb further after rising to a 26-year high at 10.2 percent in October. The world has yet to find a sustainable model after U.S. consumer spending ceased to lead the global economy, he said.

“The yen may rise above 85 per dollar” toward the end of the current fiscal year in Japan ending in March, Sakai said. “The global economic outlook remains gloomy.”

The yen traded at 89.70 per dollar as of 10:44 a.m. in Tokyo. It touched 88.01 per dollar on Oct. 7, the highest since Jan. 23. The last time the yen rose above 85 against the dollar was July 7, 1995, when it reached 84.92.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

Last Updated: November 11, 2009 23:25 EST