Hedge fund sales tipped to hit yen
By Peter Hartcher, Asia-Pacific Editor
Asia's recent happy months sheltering under the umbrella
of a strong yen could come to an end in the weeks
ahead, and perhaps very sharply, according to senior
international officials.
The Japanese yen's exchange rate against the US dollar is
one of the key determinants of the economic health of the
rest of Asia.
The yen's strength of the past two months has
transformed markets across Asia, lifting currencies,
easing interest rates and boosting stockmarkets.
The director of the foreign exchange and money market
division of Japan's Ministry of Finance, Mr Junichi
Murayama, said that stressed hedge funds could
precipitate a weakening in the yen.
The reason? Subscribers to some US hedge funds are
expected to redeem their investments in the weeks
ahead. To meet their demands, the funds reportedly will
be obliged to sell some of their yen-denominated assets
for US dollars, Mr Murayama said.
This would weaken the yen and strengthen the American
currency. Once the trend was in place, the yen value
against the US dollar could drop by as much as 25 per
cent, he said in an interview with The Australian
Financial Review.
There would be some historical symmetry here. It was
the hedge funds which brought the yen to its current
strength, snapping it from an eight-year low of ¥147 to
the US dollar in August to the current level of around
¥123.
In that episode, American hedge funds had borrowed
vast volumes of yen at low interest rates to finance their
investment plays elsewhere.
One fund alone had borrowed $US20 billion, a central
banker estimated. This was known as the "yen carry
trade".
But when the hedge funds moved to repay some of this
money, they produced the most extreme short-term
currency swings seen since the war. However, Mr
Murayama, who visited Sydney to speak at the Forex98
conference on the weekend, was careful to add that he
was not making a forecast and that the yen might also
swing in the other direction.
Separately, the first deputy managing director of the
International Monetary Fund (IMF), Mr Stanley Fischer,
said he expected some weakening of the yen.
Asked whether the yen's recent strength could persist,
Mr Fischer told the AFR recently: "We've been thinking
about that. I don't know if the yen can stay up where it is,
as the yen carry trade repayments slow down, but I
doubt it will go back where it was [around 140 to 150].
"Of course, nobody should predict exchange rates."
Market commentators expect Japanese investors to send
more of their savings to the US from today, undermining
the yen against the US dollar.
The reason is that a regulatory change effective today will
permit Japan's financial institutions to offer retail clients
the opportunity to invest in American mutual funds for the
first time.
afr.com.au
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