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Yen May Retest Record High on Quake Risk Aversion, JPMorgan Says

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May 11 (Bloomberg) -- The yen may revisit this year’s record high against the dollar as Japanese investors refrain from investing in overseas assets to reduce risk following the nation’s biggest earthquake, according to JPMorgan Chase & Co.

“Risk-averse” investors and companies may bring home as much as 10 trillion yen ($123.5 billion) as the country struggles to rebuild from a magnitude-9 quake and tsunami on March 11, said Junya Tanase, chief currency strategist at JPMorgan in Tokyo. The repatriation will contrast with growing demand elsewhere in the world for higher-yielding assets, Tanase said. Japan, the world’s largest net creditor nation, also runs one of the biggest current-account surpluses, he said.

“Given such characteristics, upward pressure on the yen may intensify as the flow of money abroad is disrupted by reduced risk appetite among domestic investors and companies,” Tanase said yesterday in a media briefing in Tokyo. “They can’t aggressively invest in foreign assets now. There will be a repatriation of funds into yen for the short term.”

Japan’s currency soared to a post-World War II record of 76.25 per dollar on March 17, six days after the record temblor. The yen gained on bets insurance companies would repatriate overseas assets to pay for reconstruction. Group of Seven nations intervened on March 18 by selling the yen to stem its advance.

The yen will rise to 78 per dollar by the end of March 2012, JPMorgan forecasts. Japan’s currency traded at 80.89 per dollar as of 11:34 a.m. in Tokyo.

Current Account

Japan’s current-account surplus totaled 1.75 trillion yen in March, compared with 1.64 trillion yen in February, according to the median estimate of economists surveyed by Bloomberg News before the Finance Ministry releases the figures tomorrow. The current account is unlikely to fall into a deficit even as the impacts of the disaster may shrink the nation’s trade surplus, Tanase said.

The yen is also likely to continue strengthening because of weaker demand for the dollar as the U.S., the world’s largest net debtor nation, keeps borrowing costs low, according to Tanase.

“The recent dollar-yen exchange rates have been derived from dollar weakness rather than yen strength,” Tanase said. “Interest rates in the U.S. must be much higher than those in Japan to stabilize the dollar-yen rate. It is abnormal that these two countries use almost identical zero-rate policies, and thus the dollar won’t see a sustained upward trend until the Federal Reserve enters a full-fledged cycle of interest-rate increases.”

The Fed will raise interest rates at the end of next year at the earliest, JPMorgan expects.

Intervention Unlikely

Japanese authorities are unlikely to act again to weaken the yen because market volatility has calmed since the earthquake, Tanase said.

One-month implied volatility for the dollar-yen rate declined to 10.13 percent today from 16.92 percent on March 17, according to data compiled by Bloomberg. 

“Any intervention decision will be made based on volatility, not on a certain level of exchange rates,” said Tanase. “As far as the dollar weakness leads to a gradual appreciation of the yen, as we expect, the level itself won’t trigger further intervention. The G-7’s joint intervention on March 18 was merely a response to an emergency situation.”

Japan sold 692.5 billion yen to purchase dollars on March 18, the only intervention during the quarter ended March 31, the Ministry of Finance said on its website today.

To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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