Raw Japan

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Whither the yen — a withering yen?

February 27, 2009

The yen’s fall against the dollar the past few weeks has been remarkably fast, and calculated from where it is now around 97.70 yen, the dollar has jumped nearly 9 percent this month, on track for its biggest such gain since August 1995.

The yen surged last year as the worsening financial crisis forced investors to unwind risky carry trades – meaning they had to buy lots of yen – under the belief that Japan’s economy and banks were holding up through the storm.

Only last month, the yen hit an over-13-year high of 87.10 per dollar. So why has the Japanese currency fallen so fast?

Analysts tell me one reason is some traders and investors who thought it would continue to rise, perhaps as far as 80 or even 70 yen, got out of such bets.

One catalyst was data showing the sharpest economic contraction in 35 years in the last quarter.

The bleak data seems to have further soured overseas investors’ views on Japanese stocks. Foreigners have been been net sellers for 12 straight weeks to the tune of 2.97 trillion yen, around $30.4 billion.

When GDP data was released last week, they sold $4.6 billion in shares, the most in three months.

So how far could the yen retreat?

After looking at technical charts, Masashi Hashimoto, senior analyst for Bank of Tokyo-Mitsubishi UFJ, warns the dollar seems headed toward the psychologically key 100 yen level and is unlikely to stop there, with a rise perhaps as far as 105 in the next few months.


To be sure, the U.S. and euro zone have their own problems, so there are doubts.

The yen’s fall could be limited by last-minute fund repatriation by Japanese investors and firms before the end of the financial year in March.

But Kimihiko Tomita, head of foreign exchange at State Street Global Markets here, says the tumble could pick up steam if longer-term investors keep shedding long yen positions, who have only just started such selling.

If that happens, all bets on a yen bottom are off.

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