Yen May Rise as BOJ More Likely to Act Than Fed, Gyohten Says

By Kosuke Goto and Shigeki Nozawa

July 15 (Bloomberg) -- The yen may rise as high as 100 per dollar this year as the Bank of Japan is more likely to raise interest rates than the Federal Reserve, said Toyoo Gyohten, former currency-policy chief at Japan's Ministry of Finance.

The Bank of Japan, which ends its monthly policy meeting today, may lift borrowing costs should inflation accelerate and the economy sustain growth of at least 1 percent, Gyohten said. Futures traders have ruled out the chance of a Fed increase next month following a collapse in the share prices of Fannie Mae and Freddie Mac, the biggest U.S. mortgage finance companies.

``The Fed is most likely to maintain its current level of interest rates,'' Gyohten, president for the Institute of International Monetary Affairs in Tokyo, said in an interview yesterday. ``The BOJ is more likely to raise rates. The medium- term trend is for a weaker dollar and a stronger yen.''

The yen has gained 14.8 percent against the U.S. currency in the past year, trading at 106.16 per dollar at 8:27 a.m. in Tokyo from 106.14 in New York yesterday. Gyohten predicts the yen, which touched an almost 13-year high of 95.76 per dollar on March 17, will stay between 100 and 110 for the rest of 2008.

Gyohten, 77, presided over Japan's currency policy in his role as vice finance minister for international affairs between 1986 and 1989. He is also senior adviser of the Bank of Tokyo- Mitsubishi UFJ Ltd., Japan's biggest publicly traded lender by assets. Gyohten, in an interview in November, correctly predicted the collapse of an ``asset bubble'' in China. China's benchmark stock index has fallen 47 percent since Nov. 1.

`Monetary Hawk'

Bank of Japan Governor Masaaki Shirakawa and his six policy board colleagues will leave the overnight lending rate at 0.5 percent at a two-day meeting ending today, according to all 39 economists surveyed by Bloomberg. Shirakawa was appointed by parliament in April, replacing Toshihiko Fukui.

``They have a new governor, who is in my view basically more of a monetary hawk, even compared with his predecessor,'' Gyohten said. ``He has a very strong view about the need for monetary normalization.''

The Bank of Japan is reluctant to keep interest rates at a negative level, after accounting for inflation, he said. In April, BOJ board members predicted the economy would expand 1.5 percent in the year ending March 2009 and core consumer prices, which exclude fresh food, would climb 1.1 percent. Inflation accelerated to 1.5 percent in May, the fastest pace since 1998.

The central bank will probably say in a report due at 3 p.m. that the economy won't expand as much as it predicted in April, while consumer inflation will be faster than projected, economists said.

Bank of Japan Odds

There is a 16 percent chance the Bank of Japan will raise its key rate by a quarter-percentage point to 0.75 percent by Dec. 31, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

The Federal Reserve has left its target lending rate at 2 percent since the end of April, after reducing borrowing costs seven times from 5.25 percent since September to prevent a housing slump from dragging the U.S. economy into a recession.

Futures on the Chicago Board of Trade show 88 percent odds policy makers will keep borrowing costs unchanged at 2 percent at their next meeting on Aug. 5, compared with a 23 percent chance a month ago.

``Just like the BOJ, the Fed is also faced with dual enemies, one in the front, one at the back,'' Gyohten said. ``In their case, the greater enemy is a recession.''

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net