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Yen to Rival Euro as Favorite Funding Source This Year, BNP Paribas Says

The yen may become the funding currency of choice in the coming year as deflation concerns keep local interest rates low and Japanese investors reduce hedges on foreign bond portfolios, BNP Paribas SA said.

The Japanese yen will drop 21 percent to 110 per dollar by mid 2011 as local investors reduce hedges on $2.9 billion of foreign portfolios once global yield curves start to flatten, analysts led by Hans-Guenter Redeker, global head of foreign- exchange strategy, wrote in a note sent to Bloomberg today. The yield of benchmark Japanese bonds will fall compared with many foreign notes in the coming year, increasing the attractiveness of those markets to local investors, they said.

“An environment of global growth together with continued ample liquidity will provide favorable conditions for the carry trade, bringing the yen’s role as a funding currency to the fore,” the London-based Redeker said. “Japan will still struggle to escape the grip of deflation, suggesting that it will not be in a position to allow rates or yields to rise for a long time to come.”

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