Yen to Climb as Japan May Seek Stronger Currency, UBS Predicts

By Stanley White Jan. 17 (Bloomberg)

Japan's government may call for the yen to gain or even buy its own currency to avoid criticism from its trading partners, said Mansoor Mohi-Uddin, global head of foreign exchange strategy at UBS AG.

The yen has fallen to a record low versus the euro and a 13-month low against the dollar this year, adding to pressure on Japan to stem losses before a meeting of the Group of Seven finance ministers and central bankers in February. At a September summit in Singapore, officials said they had an “understanding” the yen would reflect Japan's economic recovery.

“Japanese officials have warned that the yen shouldn't weaken further,” London-based Mohi-Uddin wrote in a Jan. 15 research note. “This seems motivated by concerns that a weak yen will reignite protectionist concerns in the U.S. and Europe.”

The yen traded at 120.57 per dollar at 11:35 a.m. in New York yesterday, and touched 120.77 yen, the weakest since 121.06 yen on Dec. 12, 2005. It was at 155.94 yen per euro, and set a record-low of 158.06 on Jan. 3. Japan's currency may strengthen to 95 per dollar and 128 per euro a year from now, according to UBS, the world's second-largest currency trader.

French Finance Minister Thierry Breton last month said the euro's “rapid” rise against the yen is bad for the economy. German Chancellor Angela Merkel, who holds the G-7 presidency this year, in December said the group will discuss foreign exchange at the Feb. 9-10 meeting. Japan bought its own currency in 1997 after G-7 countries, which also include Canada, Italy, the U.K. and the U.S., agreed to stabilize exchange rates.

Strong Yen Policy: President George W. Bush's administration may face calls from the Democratic Party, which won control of both houses of the U.S. Congress in November, to stem the yen's decline to protect jobs. General Motors Corp. Chief Executive Officer Rick Wagoner said a "systematically undervalued'' yen helps Japan's trade surplus by making its products cheaper overseas.

“We have a new Congress full of Democrats that like protectionism,” said Toru Umemoto, chief currency analyst at Barclays Capital Inc. in Tokyo. “The G-7 hasn't been conducting a directional foreign exchange policy. In an extreme case the G- 7 could adopt a strong yen policy. The yen may rise to 110 per dollar at year-end”, he said.

Carry Trades: Japanese policy makers may also seek a stronger yen to discourage investors from borrowing the currency to buy higher- yielding assets, known as carry trades, Mohi-Uddin wrote.

The Bank of Japan will raise its benchmark interest rate to 0.5 percent when it concludes a two-day policy meeting tomorrow, according to 35 of 52 economists in a Bloomberg News survey. That would still be the lowest in the industrialized world.

The Federal Reserve's benchmark is 5.25 percent and the European Central Bank's rate is 3.50 percent. Interest rates are at 6.25 percent in Australia and 7.25 percent in New Zealand.

Japan bought its own currency in December 1997 and from April to June 1998 to curb carry trades, Mohi-Uddin wrote. The yen is weaker now than it was when Japan last bought, according to its value versus its trading partners after adjusting for inflation, Mohi-Uddin wrote. “The Ministry of Finance should intervene in dollar/yen and euro/yen,” Stephen Jen, global head of currency research at Morgan Stanley in London, wrote in a research note. The weakening yen “attracts unwanted political attention from the U.S. and Euro-land and risks abruptly reversing later this year” to 108 per dollar and 134 against the euro.