Japan’s Credit-Default Swaps Signal Yen May Lose Haven Status

By Ron Harui and Kim-Mai Cutler

Feb. 19 (Bloomberg) -- The rising cost to protect buyers of Japan’s sovereign bonds against default signals the yen may start to lose its status as a “haven” currency, said Barclays Capital, the world’s third-largest foreign-exchange trader.

Credit-default swaps for Japan surged as high as 120.7 this week, the most in more than four years, on signs the world’s second-largest economy will fare worse than Europe and the U.S. Japan’s gross domestic product shrank the most since 1974 last quarter, a government report showed Feb. 16. Finance Minister Shoichi Nakagawa quit a day later amid accusations he was drunk at a press conference, eroding confidence in the government.

“This move is linked to a reassessment in a negative direction of the yen’s status as the world’s strongest currency amid the flight from the U.S. and EU financial crisis,” said Chotaro Morita, chief strategist at Barclays Capital Japan Ltd. in Tokyo. “There is an emerging ‘sell Japan’ story among global investors on the view that Japan may be facing less of a financial crisis, but that at the same time it is incurring the most economic damage among advanced nations.”

The cost to protect investors in Japan’s government debt from default for five years fell 10 basis points to 110 at 11:03 a.m. in Tokyo, based on ICAP Plc prices. The index reached 120.7 on Feb. 17, the highest since at least October 2004, and is up from 77.5 at the end of last week, according to CMA DataVision.

The yen traded at 93.45 against the dollar from 93.79 late in New York yesterday, when it touched 93.96, the lowest level since Jan. 7. The currency rose 23 percent versus the greenback last year, the biggest annual gain since 1987.

‘Definitely Overvalued’

Japan’s currency fell 1.8 percent this week as the world’s second-largest economy shrank 3.3 percent in the fourth quarter from the previous three months. That compares with the U.S.’s 1 percent contraction and the 1.5 percent decline for the 16 nations that share the euro.

“The yen is definitely overvalued, which has weighed on the Japanese economy, producing the worst contraction since the oil shock in 1974,” said Mickael Benhaim, who manages about $32 billion as head of global bonds at Pictet & Cie Banquiers in Geneva.

Credit-default swaps are used for protecting bonds against default, and traders use them to speculate on changes in credit quality. An increase in price suggests deteriorating investor perceptions of credit quality, and a decrease indicates improvement.

The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net