`Mr. Yen' Says Japan Can't Stem Currency's Rise as U.S. Economy Falters

The Japanese yen, the best performer among major currencies this year with a 7.9 percent gain against the dollar, may surge further as concern grows that U.S. efforts to boost economic growth will fail.

“What we are seeing is not appreciation of the yen but weakness of the dollar, reflecting concerns that the U.S. economy may falter,” Eisuke Sakakibara, formerly Japan’s top currency official, said yesterday on the Fuji television network. “There is a chance the yen will reach an all-time high and stay at that level for the time being.”

The Japanese government has yet to formulate strategy for stemming a yen surge that threatens the earnings of exporters including Toyota Motor Corp., Honda Motor Co. and Canon Inc. A report today probably will show the nation’s economy grew at the slowest pace in three quarters in the period ended June 30, economists surveyed by Bloomberg News forecast.

The yen reached 84.73 to the dollar on Aug. 11, a high since July 1995. Sakakibara -- known as “Mr. Yen” for his efforts to influence exchange rates through verbal and actual currency market intervention while at the Ministry of Finance in 1997-1999 -- said the currency may match its April 1995 peak of 79.75.

‘Feel the Pinch’

“Japanese companies will feel the pinch of a stronger yen and a weakness in share prices around the end of this year,” Sakakibara said. The Nikkei 225 Stock Average fell to a year-to- date low of 9,065.94 on Aug. 12.

Canon, the world’s second-largest printer maker loses about 6.8 billion yen of annual operating profit for every 1 yen gain in its value against the dollar and 4.1 billion yen of profit for each 1 yen rise versus the euro, the company said in April.

Sakakibara spoke after Finance Minister Yoshihiko Noda last week refrained from outlining steps to slow the yen’s rise and the Bank of Japan maintained its policy guidance.

“We will monitor economic conditions carefully and respond appropriately,” Noda said in an unscheduled press conference in Tokyo on Aug. 12. Asked whether action could include currency intervention, he declined to elaborate.

Noda and central bank Governor Masaaki Shirakawa said on Aug. 12 they were closely watching the currency, comments investors said indicate preparedness to curb the yen’s gains to protect the nation’s economic recovery.

Poised to Move?

More than a third of Japan’s margin traders think policy makers will intervene to weaken the yen if it strengthens past the 15-year high reached this week, a survey by Gaitame.com Research Institute Ltd. showed.

Lawmakers from Japan’s ruling party last week urged Prime Minister Naoto Kan to consider intervening in the currency market for the first time since 2004. They also called on the Bank of Japan to “engage in large-scale monetary easing.”

Kan and Shirakawa may meet this week to discuss measures to address the yen’s strength, the Asahi newspaper reported on Aug. 13. Kan said he’s “concerned” about the yen’s recent appreciation, Kyodo News reported on Aug. 14.

“Investors know that the Japanese government can’t come up with decisive measures that can stem the appreciation of the yen,” said Morio Okayasu, chief analyst in Tokyo at FOREX.com Japan Co., a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey.

Japan hasn’t intervened in the currency market since March 2004, when the yen was around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The currency ended 2004 at 102.63 to the dollar.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

China Favors Euro Over Dollar as Bernanke Alters Path

China, whose $2.45 trillion in foreign-exchange reserves are the world’s largest, is turning bullish on Europe and Japan at the expense of the U.S.

The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.1 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

“Diversification should be a basic principle,” Yu said in an interview, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets, instead we bought quite a lot.”

China’s position may make it harder for the greenback to rebound after falling as much as 10 percent from this year’s peak in June as measured by the trade-weighted Dollar Index. The nation cut its holdings of U.S. government debt by $72.2 billion, or 7.7 percent, through May from last year’s record of $939.9 billion in July 2009, according to the Treasury Department, which releases new data today.

U.S. Concerns

Concern the U.S. economy is faltering was underscored by the Federal Reserve on Aug. 10. Chairman Ben S. Bernanke said the central bank will reinvest principal payments on its mortgage holdings into Treasury notes to prevent money from being drained out of the financial system, its first expansion of measures to spur growth in more than a year.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting in Washington. “The Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”

Asian central banks holding some 60 percent of the world’s foreign-exchange reserves are turning away from the dollar. Concerned about weakening U.S. growth and the Treasury’s record borrowing, they are switching toward euro assets to safeguard reserves, driving gains in the 16-nation currency. South Korea, Malaysia and India reduced their holdings of Treasuries, U.S. government data show.

Cutting Treasuries

The allocations to dollars in official foreign-exchange reserves declined in the first three months of the year, to 61.5 percent from 62.2 percent in the final quarter of 2009, the International Monetary Fund said June 30.

The yen’s share was 3.1 percent, up from 3 percent, The euro’s was 27.2 percent, little changed from 27.3 percent, even after the currency tumbled 5.7 percent versus the dollar during the first quarter on speculation that nations including Greece will struggle to rein in their budget deficits.

“Short of concerns of a default, the investor community in terms of big reserve managers will probably be forced to invest in the euro zone,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, part of State Street Corp. which has $19 trillion under custody and $1.8 trillion under management. “They can’t be putting all of their eggs in one basket, which is U.S. Treasuries.”

Dollar Index

The Dollar Index’s 5.2 percent drop in July, the biggest decline in 14 months, failed to dissuade most foreign-exchange forecasters from predicting the greenback will strengthen against the euro and yen by December.

The dollar traded at $1.2817 per euro as of 7:13 a.m. in New York from $1.2754 last week, when it rose 4.1 percent. The greenback was at 85.60 yen after falling to 84.73 yen on Aug. 11, the weakest since July 1995.

The U.S. currency will climb to $1.23 per euro by Dec. 31 and to 92 yen, based on median estimates of strategists and economists in Bloomberg surveys. Economists forecast U.S. growth will be 3 percent this year, compared with 1.2 percent for the region sharing the euro and 3.4 percent for Japan.

“There’s no sign of panic or urgency from the Fed and that supports our view that this is a temporary soft patch and the U.S. economy will fight its way through,” said Gareth Berry, a Singapore-based currency strategist at UBS AG, the world’s second-largest foreign-exchange trader. UBS forecasts the dollar will rise to $1.15 per euro and 95 yen in three months.

Slower Growth

Japan’s economy expanded at the slowest pace in three quarters, missing the estimates of all economists polled, the Cabinet Office said today in Tokyo. Gross domestic product rose an annualized 0.4 percent in the three months ended June 30, compared with the median estimate in a Bloomberg survey for annual growth of 2.3 percent.

Slowing purchases of Treasuries by Asian nations haven’t hindered President Barack Obama’s ability to finance a projected record budget deficit of $1.6 trillion in the year ending Sept. 30. Investor demand for the safest investments compressed yields on benchmark 10-year Treasury notes to a 16-month low of 2.65 percent today, even after the U.S.’s publicly traded debt swelled to $8.18 trillion in July.

U.S. mutual funds, households and banks in May boosted their share of America’s debt to 50.2 percent, the first time domestic investors owned more Treasuries than foreign holders since the start of the financial crisis in August 2007.

‘Concrete Steps’

Chinese Premier Wen Jiabao urged the U.S. in March to take “concrete steps” to reassure investors about the safety of dollar assets. The nation, which is the largest overseas holder of Treasuries, trimmed its stockpile of U.S. debt to $867.7 billion in May, from $900.2 billion in April and a record $939.9 billion in July 2009.

Increases to its holdings made between June 2008 and June 2009 amid the global financial crisis were mostly in short-term securities, signaling a “lack of confidence” in the U.S. ability to reduce its debt, UBS said in a research note Aug. 9.

“China has confidence in Europe’s economy, in the euro, and the euro area,” Yu said. A member of the state-backed Chinese Academy of Social Sciences, Yu was selected by the official China Daily to question Treasury secretary Timothy F. Geithner during his June 2009 visit to Beijing about risks the U.S.’s budget deficit will undermine the value of its debt.

Chinese Purchases

Chinese purchases of Europe’s bonds come in the wake of measures taken by European policy makers to allay concern the sovereign-debt crisis will threaten the single-currency union. In May, they announced a loan package worth as much as 750 billion euros ($956 billion) to backstop euro-area governments.

That month, foreign investors were net buyers of euro-zone debt as the 16-nation currency plummeted by the most since January 2009. Foreigners purchased 37.4 billion euros of bonds and notes after buying 49.7 billion euros in April, the latest data from the European Central Bank show.

China’s concern is mirrored by neighboring central banks that are building up foreign-exchange reserves as they sell local currencies to maintain the competiveness of exporters, according to Faros Trading LLC, which conducts currency transactions on behalf of hedge funds and institutional clients.

Indonesia’s central bank and Thailand’s prime minister said in the past month they are watching the performance of their nation’s currencies amid speculation gains will curb exports. Taiwan’s dollar has depreciated in the final minutes of trading on most days in the past four months as policy makers bought dollars, according to traders familiar with the central bank’s operations who declined to be identified. Exports account for about two-thirds of Taiwan’s gross domestic product.

‘Rapidly Diversifying’

“Asian central banks, other than China, don’t want to be caught holding all of the dollars when China is rapidly diversifying,” said Brad Bechtel, a Connecticut-based managing director with Faros Trading. “When sentiment shifts and people start getting very bearish on the euro again, beware central banks might be aggressively buying euros on the other side.”

The yen has climbed 8.4 percent against the dollar this year. China bought a net 456.4 billion yen of Japanese debt in June, after purchasing 735.2 billion yen in May, which was the largest in records dating from 2005, according to Japan’s Ministry of Finance data.

“China’s policy of steady and relatively rapid accumulation of foreign-exchange reserves means they have to be invested somewhere,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “It is easy to imagine that given the low yields in the U.S. and the debt crisis in Europe, China is now willing to invest more of these reserves in the yen.”

Euro Rises for First Time in Eight Months as Sovereign-Debt Concern Eases

The euro rallied against the dollar for the first time in eight months as concern eased that the 16- nation region’s sovereign-debt crisis will worsen and spread to the global economy.

The dollar dropped in July against all of its most-traded counterparts before next week’s payrolls report as Federal Reserve Chairman Ben S. Bernanke testified last week that “the economic outlook remains unusually uncertain.” The greenback slid yesterday below 86 yen for the first time this year as a report showed U.S. economic growth slowed in the second quarter.

“European data has been surprisingly robust, while all signs are that the U.S. is heading for slower growth in the second half,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There have been some hints from Fed policy makers that further easing could be on the table should the economy deteriorate.”

The euro climbed 6.7 percent to $1.3052 yesterday, from $1.2238 on June 30, in its first monthly advance since November, when it increased 1.9 percent. The shared currency rallied 10 percent from a four-year low of $1.1877 reached on June 7. The euro gained 4.3 percent to 112.84 yen, from 108.22. The dollar slid 2.2 percent to 86.47 yen, from 88.43, in its third monthly decline.

Sweden’s krona was the best performer among major currencies in July, appreciating 8.1 percent to 7.2104 versus the dollar and climbing 1.3 percent to 9.4113 against the euro.

Sweden’s Growth

The Scandinavian nation’s gross domestic product grew 1.2 percent in the second quarter after a revised 1.5 percent advance in the first three months of the year, Statistics Sweden said on its website yesterday. The Riksbank on July 1 doubled its main lending rate from a record low to 0.5 percent to stem house price gains.

The euro rallied after the Committee of European Banking Supervisors said on July 23 that only 7 of 91 European Union banks failed stress tests.

European Central Bank President Jean-Claude Trichet told reporters in Basel, Switzerland, this week that the stress tests were “a very important transparency exercise that, I have to say, we in the ECB appreciate.” The ECB and the Bank of England both have policy meetings scheduled on Aug. 5.

An index of executive and consumer sentiment in the euro nations increased this month to 101.3, the highest level since March 2008, the European Commission said this week. The number of people out of work in Germany fell in July for a 13th consecutive month, dropping by a seasonally adjusted 20,000 to 3.21 million, the lowest level since November 2008, the Federal Labor Agency reported.

‘Strong Data’

“What’s helping the euro is continued strong data,” said John Doyle, a strategist in Washington at the currency-trading firm Tempus Consulting Inc. “That German unemployment number as well as the economic confidence, it’s enough to push it higher.”

The U.S. economy grew at a 2.4 percent annual rate in the second quarter after a revised 3.7 percent increase in the first three months of the year, the Commerce Department reported yesterday. The median forecast of 81 economists in a Bloomberg News survey was for a gain of 2.6 percent.

The unemployment rate will increase to 9.6 percent in July, from 9.5 percent in the previous month, according to the median forecast of 57 economists in a Bloomberg News survey before the Labor Department’s Aug. 6 report. Employers may eliminate 60,000 jobs from nonfarm payrolls in a second consecutive reduction.

St. Louis Fed President James Bullard wrote in a research paper released on July 29 the U.S. is moving closer to Japanese- style deflation and the central bank should resume purchases of Treasury securities if the economy slows and prices fall.

Bernanke’s View

Bernanke said in testimony on July 21 before the Senate Banking Committee that policy makers “remain prepared” to act as needed to aid growth even as they get ready to raise interest rates eventually and shrink a record balance sheet.

The yen appreciated to 85.95 versus the dollar yesterday, its strongest level since Nov. 30 and close to a 14-year high of 84.83 reached that month.

Japanese policy makers signaled this week that a stronger currency poses a danger to growth, spurring speculation they will take steps to counter that risk.

The Bank of Japan board member Hidetoshi Kamezaki highlighted in a speech in Sapporo the economic risks of a rising yen and said the bank will act to combat deflation, a more aggressive stance than his colleagues have indicated.

“We are reaching multi-year and in some respects even multi-decade lows in the dollar-yen, which is likely to result in a fair bit of rhetoric and even actions from the government of Japan,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

Nissan Motor Co. said this week it will boost output capacity in Mexico to about 700,000 vehicles a year and may consider increasing exports from the U.S. as the strong yen makes North American production more competitive.