There was no better currency than the yen last year and strategists forecast more gains this year, even as Japan promises to intervene again in foreign exchange markets and expands the world’s biggest debt burden.
The yen’s advance against every major currency illustrated the anxiety in global markets as Europe’s debt crisis stretched into a second year on the heels of the 2008 collapse of Lehman Brothers Holdings Inc. and the U.S. housing market crash.
Japanese officials sold at least ¥14.3 trillion last year to stem gains that cut profits for exporters and Finance Minister Jun Azumi has pledged more action. Intervention in 2012 may fail again as financial turmoil attracts investors to the world’s third-most traded currency for its low volatility.
“When avoiding losses trumps profits during a period of risk aversion, low-volatility assets are very appealing,” Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co., said last month. “When the U.S. and Europe moved in a bad direction and people wanted to avoid risk, the yen stood as the only currency that had enough liquidity to absorb demand.”
Besides its gains against the dollar, the world’s primary reserve currency, the yen is also the best performer among major peers after filtering out price swings, strengthening 0.5 percent, according to risk-adjusted return data compiled by Bloomberg.
Japan’s is the only Group of 10 currency seen rising versus the greenback next quarter, strengthening to 77 per dollar by March 31, analyst forecasts show.
Gains in the yen underscore the retreat from risk and losses in carry trades, whereby investors borrow in low-interest regimes to invest in higher-risk, higher-return assets elsewhere.
Carry trades involving borrowing yen to invest in the currencies of Australia, South Africa, Mexico and Brazil have lost 9.1 percent this year, according to Bloomberg data, reversing a 1 percent gain in 2010.
Japan may lose 600,000 jobs if the yen stays at current levels, pushing carmakers to shift production overseas, according to a Nov. 21 report compiled by Minister of Economy, Trade and Industry Yukio Edano and posted on the website of the National Policy Unit that reports to Prime Minister Yoshihiko Noda.
“The environment will remain harsh for exporters because they have to make a business plan taking account of the stronger yen,” said Hiroshi Morikawa, a lead economist at the Institute for International Monetary Affairs in Tokyo, which conducts research projects commissioned by the government. “Japan’s economy is still reliant on exports, so the yen’s appreciation has direct impact over employment, too.”
The yen’s surge to a postwar high of 75.35 to the dollar on Oct. 31 prompted Azumi to order the nation’s third intervention of the year that day. He said Dec. 20 he wants the ability to take “decisive” action in explaining a ministry plan to raise its intervention war chest to more than ¥65 trillion.
A previous yen record of 79.75 reached in April 1995 stood until March 11, when the earthquake and tsunami wreaked havoc on the Tohoku region, stoking speculation that companies would repatriate overseas assets to pay for rebuilding. The currency jumped to 76.25 on March 17, prompting coordinated action by the nations in the Group of Seven the next day.
The Swiss National Bank has had more success controlling its currency by imposing a ceiling on the franc at 1.20 per euro in September.