Yen Declines Against Euro on Speculation BOJ Will Lower Rates

By Stanley White

Dec. 19 (Bloomberg) -- The yen fell against the euro on speculation the Bank of Japan will today lower borrowing costs and say it will buy commercial paper to combat a global recession.

The yen may also weaken for a second day against the dollar on speculation Japanese officials will intervene to stem its surge to a 13-year high. The dollar declined against the euro, heading for its biggest weekly loss since the 15-nation currency’s 1999 debut, after the Federal Reserve introduced near- zero interest rates and said it would focus on buying debt, a policy known as quantitative easing.

“It’s clear the BOJ has to respond with some combination of rate cuts and additional measures to improve liquidity,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The alternative of doing nothing would be taken as tacit approval of sharp yen appreciation.”

The yen declined to 127.72 per euro as of 9:46 a.m. in Tokyo from 127.44 late yesterday in New York, when it reached a six- week low of 130.92. It was little changed at 89.46 versus the dollar. The yen surged to 87.14 per dollar on Dec. 17, the highest level since September 1995. The dollar declined to $1.4277 versus the euro from $1.4240. The yen may weaken to 90 per dollar today, Ishikawa said.

The yen has appreciated 25 percent against the dollar this year, the most since 1987, as more than $1 trillion of credit- market losses sparked a seizure in money markets and threw the global economy into a recession.

Rate Decision

There’s a 50 percent chance the BOJ will lower its target lending rate from 0.3 percent today, according to calculations by JPMorgan using overnight interest-rate swaps. The central bank will announce its decision around midday in Tokyo. Governor Masaaki Shirakawa will hold a briefing at 3:30 p.m. local time.

“The BOJ is set to cut rates to 0.15 percent,” Fiona Lake, a Hong Kong-based analyst at Goldman Sachs Group Inc., wrote in a note to clients. “Contrary to history, the yen is likely to benefit given the Bank of Japan’s experience with this policy framework compared to elsewhere.”

The yen fell against the dollar and euro yesterday as Japan’s government signaled it may intervene in the foreign- exchange market for the first time in four years.

Finance Minister Shoichi Nakagawa said at a news conference in Tokyo that he has “the means” to limit the yen’s rally. Central banks buy or sell currencies when they seek to influence exchange rates.

‘Abnormal’

Honda Motor Co. President Takeo Fukui this week described the yen’s level as “abnormal” and called on the government and central bank to take “swift action.” Japan’s second-largest automaker cut its full-year profit forecast by 62 percent, citing a surging yen and falling sales in North America and Europe.

“The rhetoric from Japan picked up in a fairly significant way,” said Jim McCormick, London-based global head of foreign- exchange and local-markets strategy at Citigroup Inc., in an interview on Bloomberg Radio yesterday.

The last time Japan intervened on its own, it sold a record 20.4 trillion yen ($228 billion) in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen strengthened to 103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent 3.05 trillion yen as the currency reached a low of 147.66.

Declines in the yen may be limited by speculation the BOJ may introduce new measures to increase liquidity without lowering its benchmark rate. Jiji Press and the Mainichi newspaper both said today the BOJ will keep its benchmark rate at 0.3 percent, citing unidentified people familiar with the matter.

Weekly, Yearly Loss

“There are divided views on what exactly the BOJ will do,” said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan’s second-largest publicly traded lender. “At this point, traders will simply have to wait for the outcome. Should the BOJ keep rates on hold, then the yen would rally.”

The dollar headed for a 6.4 percent decline against the euro this week after the U.S. central bank lowered the fed funds target on Dec. 16 to a range of zero to 0.25 percent, the lowest among major economies. The Fed reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying U.S. government debt.

The U.S. currency gained 2.2 percent against the euro this year, 32 percent versus the British pound and 27 percent against the Australian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.

Treasuries

Treasuries rallied yesterday, pushing yields on 10- and 30- year securities to record lows as demand for the safety of principal outweighed prospects for record debt sales. U.S. government bonds headed for their best year since 1995.

The pound was little changed at 94.70 pence per euro. It fell yesterday to a record low of 95.57 pence on speculation the Bank of England will follow the Fed in cutting the target lending rate to near zero. Sterling bought $1.5079 from $1.5015.

“We expect further economic weakness in the U.K.,” Brian Kim, a Stamford, Connecticut-based currency strategist at UBS AG wrote in a research note yesterday. “While fiscal and monetary stimulus will likely help combat the slowdown, we still target the pound at $1.45 in the next three months.”

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