Yen Falls Against Euro, Aussie on BOJ Rate Cut Speculation

By Stanley White

Oct. 29 (Bloomberg) -- The yen fell for a second day against the euro, extending its largest ever decline, as global stocks rallied and speculation increased that the Bank of Japan will lower interest rates.

The yen also declined against the Australian and New Zealand dollars after the Nikkei newspaper said the BOJ is ``leaning toward'' reducing its target rate by a quarter- percentage point to 0.25 percent on Oct. 31. The dollar fell versus the euro and the yen on speculation the Federal Reserve will cut its 1.5 percent rate by at least half a percentage point later today.

``Talk of a rate cut has taken some of the shine off the yen,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``That could help relieve overly pessimistic sentiment toward risky assets.''

The yen was at 124.74 per euro at 9:37 a.m. in Tokyo from 124.32 yesterday, when it fell 6.8 percent, its biggest decrease since the 15-nation euro's 1999 debut. The dollar fell to 97.67 yen from 98.03 late yesterday and declined to $1.2766 per euro from $1.2683. The pound rose to $1.6035 from $1.5901.

The yen may fall to 99.50 per dollar today, Ishikawa said.

Against the Australian dollar, the yen fell to 64.54 from 64.13 late yesterday in New York. It also declined by 1 percent versus the New Zealand dollar to 55.81. The Nikkei 225 Stock Average rose 7.6 percent, reflecting increased appetite for riskier assets.

In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher yields. Japan's target rate of 0.5 percent is the lowest among major economies.

Yen Versus Euro

Japan's currency has jumped 20 percent versus the euro, 33 percent against the Australian dollar and 27 percent versus the New Zealand dollar this month as the global credit crisis and a stock rout erased more than $12 trillion in equity value.

The gain in the yen has eroded Japanese exporters' overseas income. Honda Motor Co., Japan's second-largest automaker, cut its operating profit forecast for the year ended in March by 13 percent to 550 billion yen ($5.6 billion).

The Nikkei reported that Japan's economic growth forecast for 2009 is likely to be cut to between 0.5 percent and 1 percent from a prior projection of 1.5 percent.

``The first motivation for a potential rate cut is to stem the yen's appreciation,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``The second motivation is to try to prop up the economy. It's not a certainty. It may be a trial balloon.''

Safe Haven

Japan's currency dropped 0.5 percent today versus the pound to 156.47 on speculation investors will revive carry trades.

``The rally in U.S. stocks and the potential BOJ rate cut led to an unwinding of safe-haven flows to the yen,'' said Sophia Drossos, a strategist at Morgan Stanley in New York. ``What has been driving the yen stronger is not speculative positions but the repatriation of Japanese investors and deleveraging by global investors. The trend is not over yet.''

The Federal Reserve will lower its 1.5 percent target lending rate by a half-percentage point at the conclusion of its two-day policy meeting today, according to the median forecast of 69 economists surveyed by Bloomberg News. Policy makers are scheduled to announce the decision at 2:15 p.m. in Washington.

``The Fed may move to a zero interest rate policy,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``The BOJ may be worried that the rate differential will put upward pressure on the yen'' against the dollar, the note said.

The Group of Seven issued an unscheduled statement on Oct. 27 saying it was concerned ``about the recent excessive volatility'' in the yen. Japanese Finance Minister Shoichi Nakagawa said his country is ready to act in currency markets if necessary.

Governments intervene in foreign exchange markets by arranging purchases and sales of currencies.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net