The yen traded near its highest in more than a month in London after Japan's credit rating outlook was raised by Standard & Poor's, which said the economy is showing better prospects for growth.
Government reports this week may show growth in the world's second-biggest economy is fueling a rise in consumer spending.
Bank of Japan Governor Toshihiko Fukui on Tuesday said the nation's economy is moving toward sustainable growth.
"We are bullish on Japan's economic outlook and the yen," said Junya Tanase, a Tokyo-based currency analyst at J.P. Morgan Chase & Co. "In addition to exports and capital spending, which have been showing signs of improvement, the consumer sector is also performing better."
The yen traded at 106.73 per dollar at 6:49am in London from 106.76 late Tuesday in New York, according to EBS prices.
It was at 131.64 per euro from 131.72. J.P. Morgan expects the yen to strengthen beyond 100 by the end of this year, Tanase said.
S&P raised its outlook on Japan's AA- local currency debt to "stable" from "negative." The rating is the company's fourth-highest of 10 investment grades and is the lowest among the Group of Seven nations.
Spending by households headed by a salaried worker may have risen 3.4 percent last month from a year earlier, a fourth gain, a report tomorrow will probably show, based on the median of 16 forecasts. Retail sales probably rose last month for the second time in 34 months, gaining 0.5 percent from a year earlier, a separate report tomorrow may say, according to the median of eight forecasts.
Any yen advance may stall on speculation Japan will sell its currency. The Bank of Japan, which buys or sells its currency on behalf of the Ministry of Finance, sold ¥10.5 trillion (US$98.2 billion) in the two months ended Feb. 26 to protect exporters, more than half the amount spent all of last year, according to ministry figures.
Toyota Motor Corp forecast in November the yen will average 112 per dollar for the fiscal year ending March 31. The yen has averaged 113.05 so far this business year.
"They're going to get aggressive about keeping the market away from 105," said Clifford Bennett, a 20-year veteran of the currency markets and chief strategist at FxMax, a Sydney-based currency forecasting company. "We could see quite significant Bank of Japan sales of yen over the next few days."
The dollar may also weaken on concern of more terrorist strikes after the March 11 bomb attacks in Madrid and Israel's killing of the Hamas leader Sheikh Ahmed Yassin on Monday.
International investors may keep their money at home on concern of retaliatory attacks against US interests, sending the dollar lower as the nation tries to attract about US$1.5 billion a day in investment from abroad to cover a shortfall in its current account, the broadest measure of trade and investment.
"A fear of terrorism is casting a thick cloud over the dollar," said Kenichiro Ikezawa, who helps manage US$1 billion of overseas debt at Daiwa SB Investments Ltd. in Tokyo. "It's not a good time to buy dollar assets."
Ikezawa has no plan to increase holdings of dollar-denominated assets, he said, which are already less than recommended by the benchmark his fund tracks.
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