Yen to Weaken to 102 Against Dollar on Recession, Barclays Says

By Candice Zachariahs

March 6 (Bloomberg) -- The yen will fall to 102 against the U.S. dollar as risk sentiment improves and a weakening domestic economy prompts investors to buy assets outside Japan, Barclays Capital said.
The currency has lost 8.8 percent since strengthening to 87.12 per dollar on Jan. 21, the highest since 1995, as investors sold higher-yielding assets to repay low-cost borrowings in Japan. The yen will weaken 4 percent against the greenback over the next three months, Barclays Capital said, revising last month’s forecast for it to strengthen to 86. 

“The deteriorating state of both the economy and the political situation appears likely to add momentum to negative sentiment about Japanese assets,” Toru Umemoto and Yuki Sakasai, Tokyo-based strategists with Barclays Capital, wrote yesterday in a research note. “The Japanese current account is declining, outward foreign direct investment increasing and Japanese investors continue to purchase foreign securities.”
The yen slipped 0.3 percent to 98.41 per U.S. dollar as of 9:36 a.m. in Tokyo from 98.07 in New York yesterday.

Japan’s currency in February posted its worst monthly drop in more than 13 years as reports showed the world’s second- largest economy shrank the most since the 1974 oil shock and the trade deficit widened to a record.
Net investment in overseas bonds and stocks surged to a record 1.5 trillion yen ($15.4 billion) in the week ended Feb. 21, as Prime Minister Taro Aso’s disapproval rating climbed to 75 percent, the highest since he took office in September, based on Asahi newspaper surveys.

Aso Unpopular 

Support for Aso plunged after Finance Minister Shoichi Nakagawa faced accusations of drunkenness at a Group of Seven press conference last month. Nakagawa resigned on Feb. 17. The nation’s opposition Democratic Party of Japan has been rattled by the arrest of Takanori Okubo, a top aide to party leader Ichiro Ozawa.

The yen rose 12 percent in the three months to Jan. 21 as concern about the global slowdown prompted investors to sell higher-yielding assets to repay loans taken out in the Japanese currency.

“As market sentiment improves, yen appreciation driven by the unwinding of any remaining yen carry trades is likely to recede,” the strategists wrote. “Dollar-yen is likely to trend upward in coming months, although there remains short-term downside risk to decline to 95 toward the end of March, due to repatriation by Japanese institutional investors.” 

Carry trades involve borrowing in the currencies of countries with low interest rates to invest in nations with higher borrowing costs. The risk is that foreign-exchange rate movements can erase profits.
Japan’s 0.1 percent benchmark rate compares with as low as zero in the U.S., 3.25 percent in Australia and 3.5 percent in New Zealand.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
Last Updated: March 5, 2009 19:39 EST