The yen's 3.3 percent rally against the dollar in the past five weeks hasn't persuaded investors and analysts to change forecasts for a slide in the Japanese currency.
Seven major banks polled at the end of June, including Deutsche Bank, JP Morgan Chase and Brown Brothers Harriman, said the yen would weaken to ?130 per dollar or further by October, compared with ?124 at the time. Five of them still see it at ?130, while two said it will weaken to that level by year-end.
The yen climbed to ?121.93 on Friday, a 1.4 percent increase from last Friday that was its third weekly gain in five weeks, amid signs the US isn't about to recover from a period of slower growth. Still, the Japanese government said today the economy "is deteriorating further" and factory production and exports have declined "substantially."
"I'd prefer to hold dollars rather than yen," said Harriett Richmond, who oversees US$26 billion of foreign exchange at JP Morgan Investment Management in London. "The yen will lose ground against the dollar as the US comes out of its funk before Japan." Japan's economy shrank 0.2 percent in the first quarter, and economists surveyed by Bloomberg last month said they expect the economy to contract 0.3 percent in the fiscal year that began April 1. Japanese Prime Minister Junichiro Koizumi's plan to cut government borrowing and force banks to write off bad loans may keep the economy shrinking for two years, he said.
By comparison the US economy isn't expected to contract this year, although it grew at the slowest pace in eight years in the second-quarter.
"I'm not going to change my view on the yen," said Steve Barrow, a currency strategist at Bear Stearns International Ltd.
"Those who are farsighted may say Japanese equities are attractive relative to those in the US and euro-zone -- they'd still need the patience of a saint." Bear Stearns sees the yen at ?130 by year-end and ?140 by the end of 2002.
The consensus view of 58 analysts, traders and investors in Bloomberg News's second-quarter survey put the yen at ?125 per dollar by the end of next month.
``Investors are going to get better returns in the US -- the economic possibilities just look so much better there," said Stacey Seltzer, a currency economist at Brown Brothers Harriman & Co. He's forecasting the yen at ?130 per dollar in three months, and Y135 in six months.
The yen slipped on Friday as the government repeated its calls for the Bank of Japan to increase the supply of money at its meeting next week. That would weaken the currency because the amount of cash rises while demand stays the same.
Bank of Japan Governor Masaru Hayami is likely to ignore those pleas, analysts said. Hayami has repeatedly said he wants to see more action by the government to reduce debt and cut government spending before he'll ease the money supply.
Policy makers' comments are likely to keep the yen between ?120 and ?130 per dollar, investors said. Sudden yen gains will likely prompt officials to say that a strong currency isn't in the interests of the country, while sharp declines may be met with comments that the weak yen isn't justified.
Haruhiko Kuroda, vice finance minister for international affairs, said in Tokyo on Friday that ``there is no need for the yen to rise against the euro and the dollar.''
Many investors see a gradual decline in the currency as in the best interests of Japan, as it may boost growth by making exports cheaper. The pace of declines concerns other economies, which need to remain competitive. Japan's Asian neighbors may not tolerate a slide beyond ?130 per dollar, analysts said.
Japanese financial institutions faced with losses in their stock and bond holdings brought money back to Japan to shore up their balance sheets, while exporters have been taking advantage of the yen's price to bring back oversees earnings, analysts said.
"We've seen the yen strengthen because of repatriation flows," said Alan Yau, who helps manage US$6 billion at Fiduciary Trust International. "A level over ?125 was also a good chance for exporters to bring money back to Japan."
Tokyo Stock Exchange figures showed foreign investors were net buyers of Japanese equities for the five days from July 30 to Aug. 3. They were also net buyers for three of the previous six weeks.
The yen may also have been helped by speculation the US administration wants to see a weaker dollar amid pressure from US manufacturers whose exports have become uncompetitive.
Investors have been forecasting the yen at ?130 per dollar for months, and it hasn't slipped below April's three-year low of ?126.86. In March, banks including BNP Paribas, Rabobank and Royal Bank of Scotland said they expected to see the yen at ?130 per dollar or above by the end of the second quarter.
Some banks are optimistic about Koizumi's chances of pushing through his plans, and expect Japanese stocks to rise as investors speculate share prices are poised to rise with the Nikkei near a 16-year low.
"Koizumi has a higher chance of succeeding in pushing through reforms than the market thinks," said Stephen Jen, a currency economist at Morgan Stanley Dean Witter & Co. "Most investors agree that Japanese stocks are undervalued." He sees the yen at ?120 per dollar by year-end.
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