Yen gains ground in US sub-prime crisis
The hedge fund manager at Millennium Global Investments in London says slower growth in the US, Japan’s biggest export market, will cause Japanese investors to pare their overseas purchases.
By Bloomberg |
NEW YORK/TOKYO: The poorer the prospects for the US economy, the more attractive Japan’s yen is to Alan Eisner. The hedge fund manager at Millennium Global Investments in London says slower growth in the US, Japan’s biggest export market, will cause Japanese investors to pare their overseas purchases.
At the same time, the most volatile exchange rates this decade are forcing traders to buy yen to repay loans denominated in the currency. “Now is a good time to buy,” said Eisner, a senior managing director at Millennium, which has $13.3 billion in assets. “When the world is doing well, then Japanese investors are very happy to invest abroad. When the world is not looking so great, the dynamic works the opposite way.”
Investors and traders are buying Japan’s currency even as its broadest rally in eight years threatens to derail the nation’s economy. The country relies on exports for most of its growth and has a 50% chance of recession, according to Goldman Sachs Group. Automakers Mazda Motor and Nissan Motor have tumbled more than 10% this month on concern that the rising currency will erode earnings.
“We’re looking to buy yen,” said Paresh Upadhyaya, a senior vice-president at Putnam Investments in Boston who helps manage $29 billion in currencies. “The pillar of yen weakness, a buoyant global environment coupled with low volatility, has flipped.”
The yen climbed 13% against the dollar in the past six months, to 107.57 as of 10:25 local time in London. In the second half of 2007, it appreciated against the 16 most-active currencies, including the British pound, South Korean won and Mexican peso, for the first time since 1999.
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This year, the yen will gain 0.5% to 107 per dollar and 5.2% to 152 per euro, according to the median estimate of more than 35 strategists surveyed by Bloomberg. Frankfurt-based Deutsche Bank, the world’s biggest currency trader, is more bullish than the consensus, predicting a gain to 100 yen per dollar. Lehman Brothers Holdings in New York is the most bullish, expecting 95 yen. With either forecast, the currency would eclipse levels that led Japan to sell 14.8 trillion yen ($137 billion) in the first quarter of 2004, the last time it intervened in currency markets to support its export-led economy. Exports accounted for almost all of Japan’s 1.5% annualised growth in the third quarter, data from the Cabinet Office show.
“Japan is very, very likely to go into recession,” said Uwe Parpart, chief Asia economist in Hong Kong at Cantor Fitzgerald, a New York-based securities firm that specialises in trading bonds. “The impact from a stronger yen is on earnings and then, from there, on wages and investment.”
The yen may strengthen to 105 per dollar this quarter as Japanese companies convert more cash held overseas into yen to safeguard against losses in other currencies, Parpart said. Japanese sold a net 268.8 billion yen of foreign stocks in the second half of last year, after adding 425.4 billion in the first six months, according to finance ministry data.
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The Bank of Japan’s quarterly Tankan index of manufacturer sentiment fell to a two-year low of 19 points in December from 23 in September, as a stronger yen eroded exporters’ earnings, the central bank said December 14. Profit growth at large companies slowed to 1.3% in the third quarter from 14% in the second, as the rise in the yen cut margins. Canon, Japan’s biggest office-equipment maker, cut its annual sales forecast 0.4% to 4.56 trillion yen ($41.5 billion) on October 25 because of a stronger currency. The Tokyo-based company said at the time that it assumed an exchange rate of 115 yen to the dollar and 160 yen to the euro.
Shares of Mazda, based in Hiroshima, and Tokyo’s Nissan declined this month because Mazda exports 80% of its domestic production, while as much as 65% of Nissan’s operating profit comes from North America.
“A stronger yen will have an impact on our earnings next fiscal year,” Takeo Fukui, president of Honda Motor, Japan’s second-largest carmaker, said in a January 13 interview at the Detroit auto show. The rising yen caught many companies off guard. Large manufacturers expected the yen to average 113.79 per dollar for the six months ending March 31, according to the Tankan survey.
The currency’s advance comes as Bank of Japan governor Toshihiko Fukui is trying to extend the economy’s expansion after it rebounded in the third quarter from a contraction the prior three months. The central bank meets next week to set rates.
Not everyone is bullish on the yen. HSBC Holdings, Europe’s biggest bank by market value, predicts it may weaken to 115 per dollar, said David Bloom, global head of the company’s currency strategy in London. The US economy may have already bottomed and could rebound before other countries, he said.
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The carry trade is the strategy of borrowing in yen and using the proceeds to invest in countries with higher interest rates. In the first half of 2007, falling volatility and faster global growth lured investors to borrow in Japan, where the benchmark overnight rate is 0.5%. Then they turned around and bought currencies in countries such as New Zealand, where the target rate is 8.25%.
The second half of 2007 became the opposite of the first half when volatility, the bane of the carry trade, started to rise. Price swings have the potential to erase profits generated by the difference between what investors pay on their yen denominated loans and what they receive in interest.
At 10.4 percent, volatility in major currencies is a third higher than its average over the past year, according to JPMorgan Chase & Co’s G7 Volatility index. The measure reached 13.4 percent in August, the highest since 1999 and double the record low set two months earlier.
"Volatility used to be so low that people thought you should be in the carry trade until you died," said Eric Busay, a currencies and international fixed-income portfolio manager in Sacramento at California Public Employees’ Retirement System, the largest US public pension. Now investors are "questioning if the economic fundamentals are supportive of this trade."
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