After its best week in 13 months against the dollar, the yen may continue to rise next week if Prime Minister Junichiro Koizumi reassures investors in his inaugural speech that he can implement an economic-revival plan.
Last week's 2.2 percent gain for the Japanese currency, the best since the week of March 31 last year, came as investors expressed optimism about Koizumi's chances by moving funds back into Japan.
Net foreign investment in Japanese stocks was on track for its biggest monthly gain since July 1999, and international investors say they are poised to put more money in Japan if Koizumi's first policy speech today points to mending the nation's economy.
"We're increasing our exposure to Japanese equities, and we've gone up from near-zero levels" before last month's election, said Nicholas Reitenbach, chief investment officer at Pinnacle International Management, which manages more than US$600 million. "With the new political developments in Japan, it's in our interest to start adding some funds there."
Investor optimism that Koizumi will have enough political support for policies that will rescue Japan's fragile economy helped push Japan's benchmark Nikkei 225 stock index 3.5 percent higher last week. The move into Japanese stocks also helped the yen gain 2.1 percent against the euro last week.
Japanese stocks have gained since Koizumi won primary elections on April 23, with the Nikkei up 4.7 percent and the Topix index up 7 percent. With a public approval rating of 80 percent according to last weekend's Japanese newspaper polls, he succeeds Yoshiro Mori, who had approval ratings of less than 10 percent.
"You're going to have active managers who are underweight Japan scrambling" to add exposure in their investment portfolios, said Steven Schoenfeld, head of international equity strategy at Barclays Global Investors in San Francisco, with more than US$800 billion in assets. "Combined with the hopes for the new prime minister, it's got to have an impact" on the yen, he said.
Foreign investors had already channeled a net ?900 billion (US$7 billion) into Japan in the first three weeks of April, according to the latest figures from the Tokyo Stock Exchange.
Even before figures for the final week are released, the amount is bigger than any other month since July 1999.
Koizumi is expected in his speech to the Diet to promise he will clean up bad debts in the largest banks, limit government bond sales, and introduce tax measures to encourage investment in stocks, according to a Mainichi newspaper report, which cited a draft of his speech.
"There's growing enthusiasm that a turnaround may happen and the schedule for restructuring may be accelerated, and that's causing long-term investment funds to flow into Japan," said Pinnacle's Reitenbach. Still, "the economic statistics don't justify a full weighting yet," and any benefits for the yen will likely be short-lived once "reality sets in," he said.
Investors are hoping new policies will help pull Japan out of a decade of stop-start growth. The economy grew 0.7 percent in the October to December quarter, after shrinking 0.6 percent in the previous three months, hurt by waning business confidence and consumer spending, falling prices and banks buckling under the weight of bad loans.
The yen slumped 10.4 percent to near a two-and-a-half-year low in the first three months of this year on growth concerns, as a tumble in stock indexes damped demand for the currency. The Nikkei fell 14.6 percent, and the Topix lost almost 10 percent of its value in that period.
Some traders and investors remain concerned those losses could resume as the new government faces the challenge of restructuring the banking industry and the economy.
"The prospect of getting reforms pushed through isn't as high as popular sentiment has it now" and the yen is likely to slip on any disappointments, said Robert Lynch, a currency strategist at BNP Paribas. Even if new policies are implemented without delay, "there will be economic pain to go through which will result in a weaker yen" before growth in Japan can recover, he said.
Lynch said the yen may rise as far as 118 per dollar in coming days, before its gains are capped by signs of slow growth.
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