Yen May Weaken to 104 Against Dollar This Year, JPMorgan Says

By Yasuhiko Seki

April 24 (Bloomberg) -- The yen may weaken to 104 against the dollar by year-end as Prime Minister Taro Aso spends record amounts to counter the recession, spurring investors to buy higher-yielding assets, according to JPMorgan & Chase Co.

Japan’s currency also will slide as Aso’s swelling budget deficits damp the yen’s allure, said Tohru Sasaki, chief strategist in Tokyo at JPMorgan and a former chief currency trader at the Bank of Japan. Sasaki previously forecast the yen would weaken to 99 per dollar by the end of December.

“An improved economic outlook will boost risk appetite among Japanese investors and increase investments in overseas assets,” Sasaki wrote in a note to clients today.

Prime Minister Aso announced a 15.4 trillion yen ($158.2 billion) stimulus package on April 13, bringing to 25 trillion yen the total in extra spending announced since he took office in September. The government plans record bond sales to fund plans aimed at turning around the world’s second-largest economy after it shrank at the fastest pace since 1974 in the final three months of 2008.

“Japan also may need to rely on capital inflows from overseas to finance its budget deficit if it falls into a current-account shortfall,” Sasaki said. “If this happens, concerns about a huge budget deficit may prompt yen selling.”

The current account fell into deficit in January for the first time since 1996, before posting a surplus in February, government data show.

Debt Burden

Japan’s debt burden, already the world’s largest, will probably climb to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development. The OECD estimate was published before the government released its latest stimulus package.

Japan’s currency traded at 97.11 per dollar and 127.64 per euro as of 2 p.m. in Tokyo. The yen gained 23 percent against the greenback in 2008 as global financial turmoil spurred demand for the safety of the Japanese currency.

The currency may reach 107 per dollar by the end of March 2010, Sasaki wrote, revising an earlier forecast for it to stand at 102 at that time.

Against the euro, the yen may fall to as low as 145 at the end of March next year, he said, scrapping an earlier call for it to decline to 138.

Sasaki left unchanged short-term forecasts calling for the yen to strengthen to 92 against the dollar by June 30 and 120 yen versus the euro, saying stock gains are likely to wane and a change in Japan’s corporate tax laws will encourage companies to bring home profits generated overseas.

Japan started to waive taxes on repatriated profits from April 1, under legislation pushed through parliament by the ruling Liberal Democratic Party to help the economy recover. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings. If the corporate tax rate in the country where the profit was earned was less than that rate, they were forced to pay the Japanese government the difference.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net

Last Updated: April 24, 2009 01:01 EDT