Yen skids to three-year low


Japan's industrial output fell again in October as the economy weakened

LONDON, England -- The yen has fallen to three-year lows as markets take the view Japan has given them a green light to sell the yen.

London-based analysts have told Reuters news agency that Japan is making it clear it wants to see the yen weaker in a bid to slow deflation and boost exports in a last-ditch attempt to revive the economy from a decade-long stupor.

The yen hit the multi-year low against the dollar around 128 on Friday and a two-year low against the euro near 115.50.

With no recovery in sight as another year draws to a close, and the apparent approval of Japan's Ministry of Finance, investors look likely to keep on selling.

"A lot has changed this week. The market is beginning to realize the shift in MOF (Ministry of Finance) policy. This green light is very significant," Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi, told Reuters

"130 (yen to the dollar) is achievable in the early part of next year.

Some analysts have said the Japanese authorities are likely to turn a blind eye to the yen falling as far as 135 yen to the dollar.

Finance Minister Masajuro Shiokawa did complain on Friday that the pace of the yen's fall had been a bit rapid, but analysts say this was more of a case of applying the brakes to moderate the speed of the move.

More falls ahead

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Options market prices show investors are betting on more steep falls in the yen in coming weeks.

The premium investors have to pay for options to buy dollars and sell yen over options to buy yen to sell dollars, known as the risk reversal, have soared.

"Volatilities have also been bid up across the curve and with the yen having breached key technical levels, it now appears to be preparing for an attempt at testing its September 1998 low of 129.03 against the dollar," Mitul Kotecha, head of global currency research at Credit Agricole Indosuez, told Reuters.

Yen sentiment has been fairly negative in recent weeks on speculation that the Bank of Japan could buy foreign bonds to weaken the currency.

News that corporate bankruptcies rose 10 percent on the year in November and talk of more problems in the Japanese banking sector pushed the yen down further.

"Usually, you'd see Japanese exporters selling dollars when you'd get to the year's (dollar) highs. But none of that seemed to be around," said a U.S. bank trader.

The yen was also trading at two-year lows against sterling and the Swiss franc and at 11-month lows against the Australian dollar.

The Japanese equity market is now only eight months short of the record 12-year-and-seven-month downturn seen in the U.S. after the 1929 crash.

'Endgame'

But analysts say that Japan's economy is still showing no signs that recovery may be round the corner. If anything, the crisis looks set to intensify and that should keep pressure on the yen.

"A banking crisis is a more realistic view than at any time in the last few years," said Halpenny.

At the start of 2001, consensus forecasters expected near 2 percent growth in Japan but now the outcome will more likely be a small fall in output.

Meanwhile, as deflation accelerates and the financial sector remains in trouble, investors are positioning themselves.

"They're shorting the yen and that's the right attitude. There's a feeling we're reaching some kind of endgame," said Russell Jones, head of currency research at Lehman Brothers.

"There is a lot of negative momentum on the currency."

One ray of hope for the yen would be if the scale of the economic problems facing the country finally led to a coherent policy response, analysts told Reuters.