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Yen’s historical rise slows, but relief may not last

by Daisuke Yamamoto

Kyodo

The yen’s historic surge since last summer has taken a breather, particularly in light of the Bank of Japan’s expansion of monetary easing earlier this month, lessening exporters’ pain and boosting stock prices.

But it is unclear how long the trend will continue. Some watchers are cautious amid all the global economic uncertainty, especially in the United States. This means the dollar’s appreciation against the yen may be short-lived.

Behind the yen’s recent weakness, traders say, lies improved investor appetite to sell the yen, which has been considered a de factor safe haven since the Lehman Brothers debacle touched off the global financial crisis.

Investors also seem more willing to buy riskier assets on signs of improvement in the U.S. economy and monetary easing by the world’s top central banks.

The dollar rose to as high as ¥81.22 at one point in New York on Friday, the highest since early July, while the benchmark Nikkei stock index ended the day at its highest since early August as the yen’s downward trend supported export-linked shares.

The dollar has now risen nearly ¥6 since Oct. 31, when the dollar fell to a postwar low of ¥75.32. The yen meanwhile has been rising for about five years.

Exporters have breathed a collective sigh of relief because they were concerned a strong yen would hurt their earnings and force them to move more factories and jobs overseas.

The dollar-yen rate “seems to me to be returning to a normal level,” Jiro Takahashi, chairman of the Nagoya Chamber of Commerce and Industry, said at a news conference Wednesday, the day the dollar rose above the ¥80 level for the first time since early August. “It would be a huge plus,” he said, for Nagoya and its surrounding areas, where Toyota Motor Corp. and many other exporters are based.

The yen had attracted buying from investors who sought refuge amid tensions in financial markets while the sovereign debt crisis raged through the eurozone for months. Japanese exporters took a hit because a strong yen makes their exports less competitive and diminishes their overseas earnings when repatriated to Japan.

The dollar, which hit a three-month low of ¥76.03 on Feb. 1, began to rise in the days that followed, as market players digested the government data released in late January that showed Japan logged its first annual trade deficit in 31 years in 2011.

The news was a “turning point” for the dollar-yen pair because it made market players, particularly those overseas, feel Japan’s money flow has changed, said Teppei Ino, global currency research analyst at the Bank of Tokyo-Mitsubishi UFJ.

Then, on Feb. 14, the Bank of Japan announced the expansion of its asset purchase program by ¥10 trillion and set a goal of 1 percent inflation to fight chronic deflation. The decision to inject more liquidity into the financial system surprised the market, traders said, accelerating the yen’s slide against the dollar.

Signs of improvement in the U.S. economy, such as employment and housing starts, have lifted investor hopes that the world’s largest economy will revive, and dampened the prospects of further quantitative easing by the U.S. Federal Reserve.

Moreover, monetary easing steps taken by major central banks, including the European Central Bank’s massive three-year refinancing loan program for European banks last December, have left the world’s financial market awash with cheap money, helping to improve investor sentiment and create an influx of money into stocks and commodities.

The yen’s recent fall has apparently taken some pressure off the Japanese government, which was facing calls to take aggressive steps to arrest the yen’s sharp rise, and occasionally stepped into the market to weaken the currency, most recently last October and November.

Eiji Hayashida, chairman of the Japan Iron and Steel Federation and president of JFE Steel Corp., recently said that a level of ¥80 against the dollar is still hard for export-oriented manufacturers. “I personally believe that a level above ¥90 would be appropriate in light of Japan’s economic strength.”

Traders and analysts caution, however, that the yen is unlikely to weaken significantly, and it remains unclear how long its weakness will last, pointing to the shaky health of the U.S. economy and the debt problems involving Greece and other eurozone countries as risk factors to watch out for.

“Right now, the situation is summed up as yen-selling. It must change into dollar-buying,” said Ino of the Bank of Tokyo-Mitsubishi UFJ, noting the need for the U.S. economy to be “really strong” to effect that change.