FOCUS-Yen stages big turnaround, bears unconvinced
By Chizu Nomiyama
LONDON, Oct 7 (Reuters) - The yen has staged one of its most dramatic one-day turnarounds ever, but bearish analysts on Wednesday said they were yet to be convinced.
The yen has strengthened more than 10 yen per dollar, or nine percent, within 24 hours, despite what analysts say is still a dire economic picture for Japan.
A wave of yen buying flooded the market after Japan's lawmakers moved a step closer to a deal on bank reform, the biggest financial headache Tokyo has had. Japanese authorities also signalled more economic stimulus measures and the Tokyo stock market roared ahead six percent.
But economists, long used to talking about Japan's sorry state, argued there was little evidence of substantive change in the outlook for Japan to justify the currency move.
''We see this with a very jaundiced eye,'' said Dick Howard, director of economic research at Julius Baer Investments in London. ''The Japanese have talked a good game for quite a long time without really delivering.''
The yen reached 122.69 per dollar, after trading around 134 on Tuesday. It is at its strongest levels in more than seven months. It has also bounced back by 7.5 percent against the mark after reaching a six-year low on Monday.
On Wednesday alone the dollar dropped more than eight yen, exceeding its fall on June 17 this year when the Bank of Japan and the U.S. Federal Reserve intervened to buy yen.
But this time no one was talking about intervention.
What they did say, however, was that sentiment on the dollar had soured as a worldwide market crisis dented the U.S. economy.
''The dollar has been under severe pressure against all other currencies, and now dollar/yen is catching up with what has been happening to dollar/Europe,'' said Peter von Maydell, currency strategist at Credit Suisse First Boston.
''This goes beyond just what is happening in Japan...it's a recognition that the U.S. economy has suffered more severely than other economic blocs because of the crises in Latin America and Asia,'' von Maydell said.
Last week, the Federal Reserve cut interest rates by a quarter point and the market is convinced more cuts are on the way. The general view has been that even if Europe does cut rates, the U.S. will do so faster.
Such interest rate perceptions have led the dollar to a 20-month low against the mark and 21-month lows against the Swiss franc on Wednesday.
The dollar/yen fall caught the market off guard, since many thought Japanese financial institutions would start buying dollars in October, the start of the new fiscal half-year, for balance-sheet reasons.
Japanese companies repatriate their overseas funds at each half-year book closing and re-invest them abroad later in search of higher yields.
''What the market was expecting was a wave of dollar/yen buying by the Japanese in October, and others in the market were getting ready to follow suit,'' said Junpei Yamamoto, head of foreign exchange at Bank of Tokyo-Mitsubishi.
Other market dynamics have hurt the dollar. There was talk that hedge funds, after borrowing yen at Japan's cheap interest rates and buying higher-yielding investments, were now selling dollars to raise yen and repay these loans.
This unwinding of these ''carry trades'' is an attempt to offset losses made in funds' investment in the turbulent emerging markets, traders said.
Technical charts were also flashing warning signals on dollar/yen as its fall on Wednesday broke an uptrend which had been in place since April 1995.
But analysts agreed that Japan's economic fundamentals would eventually overcome market dynamics and technicals. Japan is in recession and even when the financial bills are put in place, it would be a long time before Japan's banking industry is in a comfortable position, they said.
''The economy is in very bad shape, and it's difficult to justify the yen's rise,'' said Howard. ''It should be more like 137 or even more than that.'' |
