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Goldman Capitulates as Traders Dash Kan Hopes for Yen

Japan's prime minister Naoto Kan. Photographer: Haruyoshi Yamaguchi/Bloomberg
Japan's prime minister Naoto Kan. Photographer: Haruyoshi Yamaguchi/Bloomberg

(Corrects percent of exports in Japan’s economy in sixth paragraph of an article originally published on July 20.)

July 20 (Bloomberg) -- Japanese Prime Minister Naoto Kan’s aim for a weaker yen to boost exports is running into resistance from traders who are the most bullish on the currency all year.

Bets by hedge funds and other large speculators on an advance in the yen reached the most in seven months. Goldman Sachs Group Inc. and Standard Chartered Plc are among banks that have reversed bearish forecasts on the yen. Strategists that a year ago forecast Japan’s currency would fall versus the euro are backing away from those calls, raising their predictions for the yen against the single currency by more than any other estimate on a currency pair, Bloomberg data show.

“The dollar-yen continues to frustrate those who expect the yen to weaken on the back of Japan’s expected inability to recover from the crisis,” said Fiona Lake, a Hong Kong-based economist at Goldman Sachs. “The yen is likely to strengthen further.”

The yen’s 11 percent surge against the euro in May coincided with a seasonally adjusted 1.2 percent monthly drop in overseas shipments, the engine of the nation’s recovery from its worst postwar recession. The International Monetary Fund lowered its forecast for Japan’s 2011 economic growth on July 8 to 1.8 percent from 2 percent. Kan, when he was finance minister in January, said a yen in the mid-90s level to the dollar would help exporters.

Eight-Year High

The yen traded at 112.91 to the euro and 87.08 versus the dollar as of 12:25 p.m. in Tokyo. The currency touched a more than eight-year high of 107.32 per euro on June 29 and strengthened to 86.27 per dollar on July 16, the closest its come this year to the 14-year peak of 84.83 reached on Nov 27. It has gained 12 percent since the start of 2010 according to Bloomberg Correlation-Weighted Currency Indexes, which track 10 foreign-exchange pairs based on how they trade against each other.

Japanese shipments abroad, which make up about 13 percent of the economy, advanced 32.1 percent in May from a year earlier, less than April’s 40.4 percent, the Finance Ministry said last month. The Bank of Japan raised its growth forecast for the year ending March 2011 to 2.6 percent from 1.8 percent estimated in April, while cutting next year’s to 1.9 percent from 2 percent, the central bank said last week.

Should the yen remain 10 percent higher than the average export hedging rate set by Japanese companies, annual corporate profits would fall by almost 5 percent, said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co. Real gross domestic product would decline by 0.4 percentage point.

Plant Closures

Mazda Motor Corp., which exported 78 percent of its domestic production in 2009, said full-year operating profit is reduced by 1.2 billion yen ($14 million) for every 1 yen gain against the euro, and 3 billion yen for every 1 yen advance versus the U.S. currency. Its operating profit was 9.5 billion yen for fiscal 2009 when the yen was an average 7 percent weaker against the dollar and 14 percent lower versus the euro.

Yamaha Motor Co., the world’s second-largest motorcycle maker, slashed sales forecasts and announced closures of five domestic plants last week, citing slumping demand overseas and the yen. Chief Executive Officer Hiroyuki Yanagi said the euro, which Yamaha had projected would trade at 128 yen, weakened beyond the company’s currency hedging position.

“I’m really concerned about the strong yen,” Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, which wants the Japan’s government to weaken the currency, said on July 7. “If the current condition continues, it will affect domestic production,” said Shiga, who is also chief operating officer of Nissan Motor Corp., Japan’s third-largest automaker.

Yield Gap

Goldman says the dollar may weaken to as much as 83 yen in six months from an earlier call for it to trade at 94 yen. The greenback will buy 85 yen in three months and 90 yen in 12 months, compared to earlier predictions for 92 and 98 respectively.

Standard Chartered said declines in U.S. bond yields prompted it to cut forecasts for the dollar against the yen. The yen will weaken to 93.5 per dollar by the end of September, the bank said in a note on June 29, trimming a previous call for the currency to depreciate to 98.

Treasuries due in 10 years yielded 1.80 percentage points more than similar maturity Japanese government bonds on July 6, Bloomberg data show, the least since May 20, 2009, just before the start of the yen’s rally to its 2010 high. The spread has averaged 2.20 percentage points in the past year.

Risk Aversion

“The main reason for yen strength is lower U.S. yields and global risk aversion,” said Tomoko Fujii, a senior director and foreign-exchange strategist in Tokyo at Bank of America Merrill Lynch. The bank revised its year-end target to 90 yen to the dollar from 97 on July 5.

Traders turned bullish on the yen on rising concern Europe’s debt crisis will worsen and as demand in China waned. The Asian nation’s economic expansion eased to 10.3 percent in the second quarter and industrial production cooled more than forecast in June.

Hedge funds increased bullish bets on the yen by 38 percent as net longs rose to 47,359 in the week ended July 13 from 37,926 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission. As recently as June 15 there were 3,630 net wagers on the yen’s decline.

“As long as there are doubts about the euro-zone economy and prospects for a rate increase in the U.S. remain low, the yen has a chance of re-visiting the sub-85 per dollar level,” said Takeshi Makita, senior economist at Japan Research Institute Ltd., a unit of Sumitomo Mitsui Financial Group Inc.

Tankan Survey

Kan said he’d like to see the yen at the mid-90s level to the dollar, speaking in his former job as finance minister in January. A stronger currency erodes the value of exports, which have driven Japan’s recovery from a recession that lasted from November 2007 to March of this year.

The country’s large manufacturers expect the yen to average 90.16 per dollar in the six months to March 2011, according to the Bank of Japan’s quarterly Tankan survey released July 1.

“The strengthening of the yen has added to pressure on the BOJ to implement a more reflationary policy,” said Mitul Kotecha, Hong Kong-based global head of foreign-exchange strategy at Credit Agricole CIB. “The risk is for a shift higher in dollar-yen in coming sessions from oversold levels.”

The Bank of Japan may ease monetary policy if the yen stays around 85 per dollar, Dow Jones Newswires reported yesterday, citing people familiar with the deliberations of officials at the central bank.

Currency strategists said in January that the yen would fall to 100 per dollar by year-end as the Federal Reserve raised interest rates while the Bank of Japan stood pat, according to Bloomberg data on median forecasts. They’ve trimmed those estimates to 95. Analysts also said last July the yen would decline to 141.91 per euro by the end of this year. Those projections have been slashed to 112, the biggest change among 67 currency pairs tracked by Bloomberg.

Europe Flight

The yen typically strengthens in times of financial and economic turmoil because Japan’s current-account surplus means the nation doesn’t have to rely on foreign capital. Its currency rose 23 percent versus the dollar during the global financial crisis in 2008.

Speculation that Europe’s debt crisis and slowing demand from China will hamper global growth has spurred gains lower-yielding assets. Rates on benchmark 10-year government debt are near a seven-year low in Japan and a 14-month trough in the U.S.

Governments across the 16-nation euro region are cutting spending to narrow budget deficits, threatening to undermine the economic recovery. Regulators are carrying out stress tests on 91 lenders aimed at reassuring investors that banks have enough capital to withstand shocks.

“People are selling Europe and Australia and buying yen, reducing risk,” said Masataka Horii in a Bloomberg interview on July 8, one of four investors in Tokyo for the $38.7 billion Kokusai Global Sovereign Open fund, Asia’s biggest bond fund.

‘Rightly Valued’

The currency is “rightly valued” and doesn’t need to weaken to combat deflation, Olivier Blanchard, the IMF’s chief economist, said on July 8. A stronger home currency also increases the purchasing power of its citizens, and government reports indicate Japanese companies are starting to cope with the yen’s appreciation.

Exporters said they can remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to a Cabinet survey released in February. The breakeven point was 97.33 a year earlier.

Bilal Hafeez, head of global foreign-exchange strategy for Deutsche Bank AG, said the Japanese economy can weather the stronger currency, having gone through its own financial crisis during the past decade. The country is bolstered by positive real yields on bonds, a current-account surplus and net foreign-asset holdings, he said.

“One of the main reasons analysts get Japan wrong is that they believe there is a Japan crash just round the corner,” said London-based Hafeez, whose company is the world’s largest foreign-exchange trader. “Japan looks a lot more attractive compared to the U.S., U.K. and euro area.”

Stripping out the decline in consumer prices, the real yield on 10-year Japanese government bonds is 2 percent. That compares with 1.86 percent in the U.S., 0.15 percent in the U.K. and 1.75 percent in Germany, after accounting for rising prices in those three economies.

To contact the reporters on this story:
Ron Harui in Singapore at;
Yasuhiko Seki in Tokyo at

To contact the editor responsible for this story:
Rocky Swift at

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