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UPDATE 2-Japan's "Mr Yen" fuels view yen swinging to down trend

Published 04/04/2011, 04:59 AM
Updated 04/04/2011, 01:44 AM

* Former FX official sees yen falling 3-6 months

* Yen to weaken medium-to long-term-former BOJ official

* Markets speculate on return of yen carry trade

* Japan rate difference with ECB, Feb seen weakening yen

* Japan policy seen loose, ECB, Fed move towards tightening (Adds analyst quotes, more details)

By Leika Kihara and Tetsushi Kajimoto

TOKYO, April 4 (Reuters) - The yen will weaken in coming months possibly beyond 90 yen per dollar, Japan's former currency czar Eisuke Sakakibara said on Monday, underlining expectations a near four-year rally in the currency may be over.

A former senior Bank of Japan official also forecast the yen would decline, weighing into an intensifying debate in financial markets on whether the currency is poised for a lasting reversal after striking a record high of 76.25 per dollar in March.

The push to the record high was sparked by speculation that Japanese would repatriate funds for reconstruction following an earthquake and tsunami on March 11 that also shut down a nuclear power plant to leave engineers scrambling to prevent a meltdown.

G7 intervention to knock the yen back and expectations Japan's central bank may further ease its already ultra-loose monetary policy just as the European Central Bank and the Federal Reserve look poised to raise rates could fuel the yen's longer-term turnaround.

The currency traded at 84.05 per dollar on Monday.

"I would not be surprised if the dollar/yen exceeds 90," said Sakakibara, who was known as Mr Yen in the 1990s when he spearheaded currency intervention by Japan to stem a rise in the yen.

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"This atomic power issue is an incident which would result in depreciation of the exchange rate... This kind of depreciation of the currency will probably continue at least for some time to come, for the next three to six months," Sakakibara told foreign correspondents in Tokyo.

Sakakibara served as vice minister for international affairs at the finance ministry between 1997 to 1999. Although he is now a professor at Aoyama Gakuin University in Tokyo, his currency comments are still closely followed by investors.

The yen has risen steadily from 124 yen in the middle of 2007 and speculation that its trend may be turning has also spurred talk of a return of the yen carry trade, a trading tactic where the low-yielding currency is used to fund investments in higher-yielding assets. [ID:nL3E7EV00H]

That explains a roughly 16 percent rally in the Australian dollar against the yen since a low on March 17, currency traders said.

While Japan's central bank has set official interest rates at 0-0.1 percent, the Reserve Bank of Australia has set its rates at 4.75 percent, suggesting a significant yield pick up from investing in Australia assets.

Japan's yield differences are also set to deteriorate against the European Central Bank and the U.S. Federal Reserve.

The ECB is widely expected to raise its policy rate on Thursday to 1.25 percent from 1.0 percent on worries about inflation.

Fed officials have sounded more hawkish in recent remarks as U.S. unemployment has fallen steadily, raising expectations that the U.S. central bank is moving closer to boosting rates, which were pushed to effectively zero during the global financial crisis.

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The Bank of Japan's ultra-loose monetary policy would likely weaken the yen in the medium- to long-term, Eiji Hirano, former executive director at the BOJ, said in separate comments on Monday.

But if the yen spikes up sharply again, the Group of Seven is likely to step into the currency market again, Hirano, who used to attend G7 meetings, told Reuters in an interview.

" The yen's move just after the quake was a perfect case for concerted intervention," he said. "The markets are still unstable. In the event of severe market turmoil, the G7 nations may jointly intervene again."

At its April 6-7 policy meeting, the BOJ is likely to underline its dovish policy stance by discussing the launch of a credit line to financial institutions in the quake-affected areas.

It may also consider further monetary easing to help the economy cope with the disaster that caused power shortages in Tokyo and areas north of the capital, regions that Nomura says produces half of the economy's activity. [ID:nL3E7F105M]

"The yen would naturally be investors' least favourite if the global economy is to recover as expected, given various risks facing Japan's economy, most notably the nuclear crisis," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance in Tokyo.

"The BOJ is unlikely to consider a rate hike probably through next year while the Federal Reserve may raise rates late this year. This is a good enough factor to revive the yen carry trade, although the chances of safe-haven buying of the yen are still there if commodity prices surge."

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A reversal of the yen's long-term uptrend would seem to be positive news for Japan's export-reliant economy.

But policymakers are starting to worry that a weak yen could hamper a recovery as import needs grow for energy and resources for reconstruction. [ID:nL3E7EU3P6]

Not all investors are signalling the yen's fall would be sustained.

Mohamed El-Erian, co-chief investment officer of top bond fund PIMCO, said last week Japan will repatriate more funds than markets expect to finance its reconstruction efforts, strengthening the yen.

In contrast, Sakakibara told reporters that foreign money leaving the country was a cause for concern.

"This atomic energy crisis will continue for a long time, so that risk could be perceived as a very serious country risk for this country." (Writing by Rie Ishiguro; Editing by Tomasz Janowski and Neil Fullick)

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