Yen May Rise to 80 a Dollar Unless Japan Intervenes, RBS Says

By Yasuhiko Seki and Shigeki Nozawa

Feb. 4 (Bloomberg) -- The yen may climb to 80 per dollar by mid-year unless Japan intervenes to support its export-dependent economy, according to Royal Bank of Scotland Group Plc.

The U.S. government, which is raising record amounts through bond sales to spend its way out of a recession, may welcome Japanese intervention as long as the dollars it buys are used to purchase U.S. Treasuries, Masafumi Yamamoto, head of foreign-exchange strategy at Royal Bank of Scotland in Tokyo, wrote in a research note yesterday.

“The U.S. needs to issue a huge amount by selling Treasuries but China is unlikely to increase purchases,” said Yamamoto at the biggest U.K. bank, who confirmed the contents of the report. “Japan, which wants to avoid further appreciation in the yen, is now the best candidate to replace China’s role. Mutual interest between U.S. and Japan now match.”

The yen strengthened to 87.13 per dollar on Jan. 21, the strongest level since July 1995, after gaining 23 percent last year as the global financial turmoil spurred investors to buy Japan’s currency as a haven. The yen traded at 89.59 per dollar as of 11:48 a.m. in Tokyo.

The yen’s strength has sapped earnings at Japanese exporters such as Toyota Motor Corp. and Honda Motor Co., the nation’s two largest carmakers, which led the biggest drop in the country’s auto sales in 35 years last month.

‘Worst Case’

Further yen appreciation is likely to shrink profits of exporters further, weigh on share prices and induce an increase in the repatriation of funds to Japan, Yamamoto said. This is “the worst-case scenario” facing the Japanese government and may cause the yen to climb to 80 per dollar, he said.

The world’s second-biggest economy will shrink 2 percent this year, according to the median estimate of 21 economists surveyed by Bloomberg News. The worst estimate is for a 5 percent contraction.

“The yen is the most critical problem for exporters,” Masakazu Kubota, a managing director in Tokyo at Keidanren, a Japanese business lobby, said in an interview with Bloomberg last week. “Whether the government does it alone or in cooperation with others, they should do something about the yen. Industry is crying out for it.”

While the Bush administration was opposed to intervention in the foreign-exchange markets, President Barack Obama’s economic team may welcome Japanese authorities selling the yen as that may increase their ability to buy Treasuries, Yamamoto said.

Record Sales

The U.S. Treasury said on Feb. 2 it will borrow 34 percent more this quarter than initially projected as weaker economic growth and a Federal Reserve borrowing program spur the government to sell more debt.

Borrowing needs in the three months to March 31 will be $493 billion, compared with $368 billion predicted in November, the Treasury said. The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the previous 12 months, according to Goldman Sachs Group Inc.

Japan sold some 35 trillion yen ($39.2 billion) to prevent the appreciation of the currency between 2003 and April 2004 and invested the proceeds in Treasuries, which boosted its foreign- exchange reserves.

By using the same strategy, Japan may enhance the impact of monetary easing in its own economy, while helping to finance the U.S. debt and supporting global stocks, Yamamoto said.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa@bloomberg.net.