Carry trade, investment flows pressure yen

Japanese Prime Minister Naoto Kan’s wish for a weaker yen is coming true as the strengthening global economy encourages the nation’s investors to send more of their money overseas in search of higher yields.

The yen has depreciated 8.1 per cent from its August peak against a basket of nine developed-nation peers, Bloomberg Correlation-Weighted Currency Indexes show. The lower exchange rate marks a turnaround from early 2010 when global investors demanding a refuge from Europe’s sovereign-debt crisis propelled it to a 15-year high versus the dollar.

Declines are being driven by the growing gap between yields on Treasuries and Japanese government bonds and the revival of carry trades, when investors borrow where yields are low, such as in Japan, to buy assets in higher-returning countries. Kan, whose approval rating fell to 17.8 per cent last month in a February 17 Jiji Press survey, may benefit from a weaker yen that bolsters profits at exporters such as Toyota Motor Corp.

“Investors will be seeking higher yields overseas, given yields are so low in Japan,” said Kei Katayama, leader of the foreign fixed-income group at Daiwa SB Investments Ltd in Tokyo, which manages $54.3 billion in assets. “Developing nations are gaining momentum, and this trend won’t change easily.”

The yen may weaken to 86 per dollar by the end of the second quarter and 90 by the end of the year, according a Bloomberg News survey of 40 forecasters. The currency has fallen 1.3 per cent this month to 83.10 on Monday.

Treasury yields
The shift out of the yen comes as Treasury yields rise on speculation the US economy and inflation are accelerating, boosting demand for assets linked to growth. US gross domestic product will expand 3.2 per cent this year, compared with 2.9 per cent in 2010, while the 10-year note yield may rise to 3.94 per cent from 3.29 on December 31, according to Bloomberg News surveys.

In Japan, 10-year yields are forecast to rise this year to 1.24 per cent from 1.13 per cent on December 31 as the nation’s economy grows 1.4 per cent, according to Bloomberg News surveys.

Investment flows into Japanese mutual funds that focus on offshore assets rose 14 per cent to 624.6 billion yen ($7.51 billion) in January from a year earlier, according to the Investment Trust Association.