Yen Weakens as BOJ Rpt Shows Confidence Less Than Expected

[HenryTo]

Interestingly, the Yen has actually regained its losses and is now rising as I am typing this, even though the Tankan report was worst than expected:
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Yen Weakens as BOJ Report Shows Confidence Less Than Expected

Dec. 14 (Bloomberg) -- The yen weakened against the dollar and the euro in Asia after the Bank of Japan's quarterly Tankan report showed confidence among large manufacturers was less than economists expected in the fourth quarter.

The yen added to its 15 percent slide this year as the report raises speculation the pace of growth in the economy isn't enough to push up consumer prices and allow the central bank to change policy. Governor Toshihiko Fukui on Dec. 8 said the bank is near a shift in policy as consumer prices will probably show ``solid'' gains in the first quarter of 2006.

``A worse-than-expected Tankan encourages investors to sell the yen,'' said Etsuko xxx, chief economist in Tokyo at Sumitomo Mitsui Banking Corp. ``A weaker number may raise questions about the BOJ tightening monetary policy in April.''

The yen dropped to 120.18 per dollar as of 8:53 a.m. in Tokyo from 119.95 yen late yesterday in New York, according to electronic foreign-exchange dealing system EBS. The yen fell to 143.55 against the euro from 143.23.

The yen will move to 119.50 and 122 against the dollar this week, xxx said.

Zero Rates

The bank's so-called Tankan report showed an index of confidence among large manufacturers rose to 21 points in December, compared with a median forecast for 23 points from 37 economists surveyed by Bloomberg News. The index was 19 points in September. A positive number means optimists outnumber pessimists.

The dollar has gained this year as the Federal Reserve increased interest rates while the Bank of Japan has kept rates near zero percent.

The Fed raised its target rate for overnight loans between banks for a 13th straight time yesterday, increasing it a quarter-percentage point to 4.25 percent, in line with predictions from all 22 primary dealers in U.S. government securities surveyed by Bloomberg News. Fifteen expect the rate to reach 4.75 percent by the middle of next year.

The yen may also add its 3 percent slide against the euro this year as the European Central Bank tightens monetary policy. The Bank of Japan, which starts a two-day policy meeting today, is expected to keep rates on hold.

The European Central Bank raised its key rate to 2.25 percent on Dec. 1, the first increase in five years.

The yen fell to a record low of 143.61 against the yen on Dec. 12.

20-Year Low

The dollar has surged this year as investors such as hedge funds and other large speculators increased bets the dollar would gain against the yen to a record.

The difference in the number of wagers on a yen decline compared with those on a gain -- so-called net shorts -- rose to a record 71,643 on Dec. 6, from 64,000 a week earlier, figures from the Washington-based Commodity Futures Trading Commission on Dec. 9 showed.

The yen is trading at its lowest against overseas currencies in two decades, when adjusted for inflation, according to figures from the Bank of Japan.

The Japanese yen's effective exchange rate was 106.2 in November, according to preliminary figures from the central bank, the lowest since 101.9 in October 1985.

[HenryTo]

Well, the Yen is now up one percent as I am typing this. What this chief economist (note economists are not good people to listen to when it comes to trading) didn't take into account is this:

1) The disappointment of the Tankan survey is causing foreign fund managers to exit Japanese equities. We know that these fund managers have either been borrowing Yen or have been hedging their currency risks to buy Japanese equities. Returning the Yen or removing these hedges are both bullish for the Yen.

2) Japanese pension funds are now attracted to long-dated Japanese bonds again at a yield of just over 2%. While this may not get them to the target return rate of generally 3% or so, it is much better than holding U.S. bonds without any currency hedges - given that the Yen has depreciated more than 15% against the U.S. dollar YTD already.

The Yen saga continues to unfold...