Yen Drops This Week as Japan’s Inflation Slows, Output Declines

By Ye Xie and Stanley White

Dec. 26 (Bloomberg) -- The yen posted its first weekly decline against the dollar in two months as Japan’s inflation slowed and industrial production slumped, adding to bets the central bank will pump cash into the economy at a faster pace.

Japan’s currency depreciated for a third week versus the euro as Bank of Japan policy board member Hidetoshi Kamezaki said officials may consider “extraordinary steps” to improve access to funding for companies. The dollar fell for a fifth week against the euro as reports showed U.S. holiday-season spending declined.

“The economic outlook for Japan remains dark,” said Gareth Sylvester, senior currency strategist in San Francisco at HiFX Plc, a U.K.-based foreign-exchange brokerage firm, in an interview on Bloomberg Television. “That should be reflected in yen weakness.”

Japan’s currency fell 0.5 percent to 90.81 per dollar at 4:54 p.m. in New York, from 90.38 yesterday. It slid to 90.99 on Dec. 23, the weakest level since Dec. 15. The yen may decline to 92 per dollar in three weeks before strengthening to 85 in the first quarter of 2009, according to Sylvester. The yen fell 0.6 percent to 127.40 per euro from 126.67. The euro was little changed at $1.4023 from $1.4025.

The ruble declined to a record against the euro as Russia’s central bank extended devaluation to compensate for falling crude oil prices. The ruble dropped as much as 1.6 percent to 40.8931 per euro, the weakest level since the European currency was introduced in 1999. It touched a four-year low of 29.0577 against the dollar, dropping 19 percent since early August.

Weaker Pound

Sterling moved closer to parity with the euro yesterday, sliding to a record 97.32 pence. The pound was quoted at 96.03 pence and $1.4634 today.

The yen fell 1.7 percent this week versus the dollar, the first weekly decline since the five days ended Oct. 31, and weakened 2.5 percent versus the euro. Japan’s currency also slid 2.2 percent against the Australian dollar and 1.8 percent versus New Zealand’s currency. The U.S. dollar decreased 0.8 percent versus the euro from Dec. 19.

Japan’s consumer price index excluding fresh food rose 1 percent last month, after increasing 1.9 percent in October, the government said today in Tokyo. Factory output tumbled 8.1 percent in November from the previous month, the fastest pace in 55 years.

The central bank lowered the overnight lending rate on Dec. 19 to 0.1 percent from 0.3 percent, the second cut in two months, and decided to buy corporate debt for the first time to pump money into the ailing economy.

BOJ Policy

Room for cutting borrowing costs further is “limited,” and the bank’s next policy steps should focus on improving funding for companies and influencing longer-term borrowing costs, Kamezaki told reporters.

“Additional policy easing isn’t likely to focus on the benchmark rate,” Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former BOJ currency trader, wrote in a research note today. “A sudden decline in the inflation rate could push nominal long- term yields lower and become a reason to sell the yen.”

Japan’s currency gained 28 percent against the euro and 23 percent versus the dollar this year as the global recession and $1 trillion in losses on mortgage-related securities worldwide prompted Japanese investors to sell higher-yielding assets and repatriate overseas earnings. It was on course for a 57 percent advance against the Australian dollar and a 67 percent increase versus the British pound.

Yen and Exports

The surge of the yen, which reached a 13-year high of 87.14 per dollar on Dec. 17, is amplifying the woes of exporters including Toyota Motor Corp., Honda Motor Co. and Sony Corp. Japan’s overseas sales declined a record 27 percent in November from a year earlier, the Finance Ministry reported on Dec. 22.

The yen may weaken as the drop reduces demand for the currency, according to Boris Schlossberg, director of foreign- exchange research in New York at GFT Forex, an online currency brokerage.

“Japan is really losing a lot of its ability to generate surplus from its trade,” said Schlossberg in an interview on Bloomberg Television. “That’s really changed the mind of the market as far as the safe-haven status of the yen goes.”

The U.S. greenback declined for the week against the euro as the recession led consumers to trim spending. U.S. retail sales fell as much as 4 percent this holiday season as consumers limited purchases to necessities, according to SpendingPulse.

“The dollar looks vulnerable and may fall by the middle of next year,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. “The state of the U.S. economy suggests the dollar will weaken.” The dollar may reach its post-World War II low of 79.75 yen next year, he said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
Last Updated: December 26, 2008 17:08 EST