Yen Extends Drop as Noda Sets Stage for Japan Elections

By Monami Yui and Kristine Aquino - Nov 14, 2012 3:21 PM GMT+0800

The yen extended declines against its major peers as Japanese Prime Minister Yoshihiko Noda paved the way for elections that may usher in a new government with a more aggressive monetary-easing stance.
The yen snapped a five-day advance versus the euro as investors speculated that a political power shift will put more pressure on the Bank of Japan (8301) to add stimulus to revive the world’s third-largest economy. The euro rebounded from the lowest level in two months as a technical indicator signaled its recent decline may have been too rapid.

“The opposition Liberal Democratic Party is likely to win the election if it happens,” said Masafumi Yamamoto, chief foreign-exchange strategist in Tokyo at Barclays Plc. “The LDP head will then aim for higher inflation and increase pressure for the BOJ to ease further. That speculation has triggered a sell-off in the yen.”
The yen fell 0.7 percent to 101.51 per euro as of 7:16 a.m. in London. The currency slid 0.6 percent to 79.84 per dollar. The euro rose 0.1 percent to $1.2711, after yesterday touching $1.2662, the weakest level since Sept. 7.

Noda said he is willing to dissolve the Diet on Nov. 16, setting the stage for elections that polls show his ruling Democratic Party of Japan will lose. Speaking in parliament a day after the DPJ reached a deal with the two main opposition parties on legislation to fund the rest of this year’s budget, Noda said he would dissolve the lower house if a deal is reached to cut the number of lawmakers in the chamber.
Shinzo Abe, head of the LDP and a former prime minister, said he agreed.

BOJ Purchases

The BOJ increased its asset-purchase program by 11 trillion yen ($138 billion) to 66 trillion yen on Oct. 30, saying the central bank and the government will make “utmost” efforts to overcome deflation. Governor Masaaki Shirakawa and his board next meet on Nov. 19-20.
Kyodo News reported today Japan’s government will cut its economic assessment for a fourth-consecutive month in a report due Nov. 16, citing people close to the matter. Data this week showed the nation’s gross domestic product contracted in the third quarter by the most since last year’s record earthquake as exports slumped and consumer spending slid.

A stronger yen makes Japanese products costlier overseas, reducing the competitiveness of domestic exporters, while it cuts the value of income earned abroad when repatriated. The yen is 5.9 percent from its post-World War II record of 75.35 against the dollar reached Oct. 31, 2011.
“The BOJ wants a weaker yen,” said Thomas Harr, head of Asia local markets strategy at Standard Chartered Plc Singapore. “They need to do some more to keep their momentum going.”

Industrial Production

The 14-day relative strength index for the euro versus the dollar fell to 33.4 yesterday, near the 30 level that some traders see as a sign that an asset price may reverse course. A similar gauge for the single currency against the yen declined to 37.8.

Gains in the euro today were limited before data forecast to show industrial production fell in the currency bloc, adding to signs that the region’s debt crisis is hampering growth.
Industrial output in the 17-member euro area declined 2 percent in September from August, when it increased 0.6 percent, according to the median estimate of economists in a Bloomberg News survey before the data release today.

G7 Volatility

“The euro will probably weaken over the rest of the week,” said Peter Dragicevich, a currency economist in Sydney at Commonwealth Bank of Australia (CBA), the nation’s largest lender. “The economic data in Europe is still continuing to deteriorate. The outlook for the economy still remains quite poor.”
The euro lost 6.3 percent in the past 12 months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen slid 2.6 percent and the dollar rose 1.3 percent.

Implied volatility of three-month options for Group-of - Seven currencies fell to 7.2 percent today, matching the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease in price fluctuations makes investments in currencies with higher lending rates more attractive because the risk becomes smaller that market moves will erase profits on such trades.

In the U.S., President Barack Obama is due to meet with Republican and Democrat leaders on Nov. 16 for talks on how to reduce budget deficits and avert the $607 billion in automatic spending cuts and tax increases slated to take effect Jan. 1. The Congressional Budget Office has forecast that the fiscal cliff would push the economy into a recession next year.

‘Anemic’ Growth

The U.S. central bank can’t act as a substitute for Congressional actions, Dallas Fed President Richard Fisher said in an interview on CNBC yesterday. U.S. growth is “anemic,” said Fisher, who doesn’t vote on policy this year.

The policy-setting Federal Open Market Committee last month voted to continue buying $40 billion in mortgage debt per month until the employment outlook improves. The central bank bought $2.3 trillion of bonds in its previous two rounds of so-called quantitative easing from December 2008 and June 2011, when the Dollar Index (DXY) dropped about 14 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, rose 0.1 percent to 81.131, after yesterday reaching 81.241, the most since Sept. 6.
South Korea’s won advanced for the first time in three days after unemployment dropped to a four-year low and the central bank governor said Asia’s fourth-largest economy will improve in 2013.
The nation’s jobless rate fell to 3 percent last month, the least since February 2008, a government report showed today. Economic growth will “bounce back” next year as global conditions improve, Bank of Korea Governor Kim Choong Soo said at a forum in Seoul today. The central bank will work to curb excessive volatility in the won, he said.
The won rose 0.5 percent to 1,085.05 per dollar.

To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net