Yen May Weaken 13% Against Dollar, Hedge Fund Says

Date: Tuesday, February 17, 2009
Author: Theresa Barraclough and Kim Kyoungwha, Bloomberg.com

The yen may weaken 13 percent against the dollar this year as Japanese exporters lose competitiveness and the nation’s economic slump deepens, according to Asia Genesis Asset Management Pte.

The decline in Japan’s currency may wipe out more than half its gains from 2008 that were spurred by the flight into haven currencies due to the global financial crisis, said Chua Soon Hock, managing director of the Singapore-based hedge fund. The yen may also fall against South Korea’s won and China’s yuan as the flow of funds brought home by Japanese investors before the financial year-end on March 31 dries up this month, he said.

“The factors that favor a weakening yen are ignored but are building up,” Chua said in comments sent today by e-mail. “Japanese exporters, like car and electronic manufacturers, are being priced out of the global market and are almost totally uncompetitive against the Koreans and Taiwanese.”

The yen traded at 91.68 per dollar as of 7:29 a.m. in London from 91.93 in New York last week. Japan’s currency may fall as low as 105 against the greenback before year-end, Chua said.

“If the yen maintains its strength, the Japanese economy will only collapse further from the already depressed situation,” he said. “Too many commentators in the mainstream media are bullish and confident on the yen, extrapolating the past 19 months’ appreciation.”

Japan’s economy shrank 12.7 percent last quarter from a year earlier, the biggest decline since the 1974 oil shock, the government said in a report today. South Korea’s economy contracted an annual 3.4 percent in the same period, the central bank said in Seoul last month.

‘Ridiculous Stage’

The “flight to quality-risk aversion into the yen is now at a ridiculous stage as Japan’s economic situation has become the worst among major trading nations with little hope of getting better,” Chua wrote.

The world’s second-largest economy shrank 3.3 percent from the previous quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the eurozone’s 1.5 percent decline, which was the biggest in at least 13 years.

“There’s no doubt that the economy is in its worst state in the postwar period,” Japan’s Economic and Fiscal Policy Minister Kaoru Yosano said today in Tokyo. “The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown.”

The yen may be near a long-term peak, and there is an increasing likelihood it will weaken both on fundamental grounds, and technical ones, Chua said.

‘Win-Win’ Intervention

“It is in Japan’s and the U.S.’s interest to have the Bank of Japan intervene to sell yen and buy U.S. dollars,” he said. “The U.S.-Japan strategic alliance calls for this type of win- win foreign-exchange intervention.”

The strongest major currencies in the Asia-pacific region over the next 12 months will be the Korean won, the Chinese yuan and the Singapore dollar, Chua said.

The Korean currency has slumped 34 percent against the dollar in the past 12 months, the biggest drop among the 10 most- traded Asian currencies. The won’s weakness has helped protect the earnings of Hyundai Motor Co., Korea’s biggest automaker, and other exporters from the global economic slump.

The yen’s 18 percent gain in the same period has squeezed earnings at Japanese carmakers such as Honda Motor Co.

Hyundai Motor said its profit tumbled 28 percent in the three months to Dec. 31 from a year earlier, while Honda reported a 90 percent slide in net income in the same period.

The yen climbed to 6.46 against the won from 11.94 at the end of 2007 and advanced to 60.54 versus the Singapore dollar compared with 77.56. China’s yuan traded at 6.8344 a dollar in Shanghai, little changed from 6.8335 on Feb. 13, according to the China Foreign Exchange Trade System.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.