Yen Rises as G-7 Says Slump to Persist, Japan’s Economy Shrinks

By Ron Harui and Candice Zachariahs

Feb. 16 (Bloomberg) -- The yen rose after finance ministers from the Group of Seven nations said the “severe” global slump will persist for most of 2009 and Japan’s economy shrank by the most since 1974, spurring investors to sell riskier assets.

The yen snapped two days of losses against the dollar and the euro as G-7 officials refrained from making any statement in support of efforts by Japan to weaken its currency. The pound fell versus all of the 16 most-active currencies after the Confederation of British Industry said the U.K. economy will contract at almost twice the pace previously forecast this year.

“The G-7 statement excluded reference to the yen and Japan’s GDP report was poor, which probably kept investors risk averse,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “There’s a bias for the yen to strengthen.”

The yen climbed to 91.58 against the dollar as of 12:41 p.m. in Tokyo from 91.93 late in New York on Feb. 13. It advanced to 116.99 per euro from 118.37. Japan’s currency climbed 1 percent to 59.75 versus Australia’s dollar and rose 1 percent to 47.56 against New Zealand’s dollar.

Japan’s currency may appreciate to 89 per dollar and 115 versus the euro this week, Kurabe said. Exchange-rate movements may be volatile in Asian trading as a national holiday in the U.S. reduces volumes, he said.

The U.S. dollar gained to $1.2777 per euro from $1.2862 in New York last week, and climbed to 1.1662 Swiss francs from 1.1590. The British pound fell 0.9 percent to $1.4233 and weakened 0.2 percent to 89.75 pence per euro.

‘Disorderly Movements’

“It was notable that the G-7 described the current situation as a ‘severe’ downturn,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “The gloomy outlook for the global economy combined with limited references to the currencies or to intervention all indicate risk-sensitive currencies will be heavy.”

The G-7 repeated its traditional message that “excess volatility” and “disorderly movements” in exchange rates must be avoided. The group accounts for about two-thirds of the world economy and is composed of the U.S., Japan, Germany, U.K., Italy, Canada and France.

The yen remained higher and Japanese stocks declined after the Cabinet Office said Japan’s economy shrank 12.7 percent in the fourth quarter from a year earlier. That was the third straight quarter the economy has contracted.

Japanese exporters have seen the yen value of overseas sales slump as the local currency advanced 21 percent against the dollar in the past six months. The yen has been the best performer among the 16 most-traded currencies in that time.

Risk Aversion

Japan’s GDP report triggered “selling of stocks and revived risk aversion, thereby supporting the yen as a safe-haven” currency, said Yoshifumi Suzuki, a foreign-exchange dealer at Hachijuni Bank Ltd. in Tokyo.

The Nikkei 225 Stock Average fell 0.2 percent and the MSCI Asia Pacific excluding Japan Index dropped 1.6 percent. Implied volatility on one-month dollar-yen options rose to 17.98 percent today from 17.91 percent on Feb. 13, suggesting a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits. The benchmark rate is 0.1 percent in Japan, compared with 3.25 percent in Australia and 3.50 percent in New Zealand, encouraging investors to borrow in yen and invest in higher-yielding assets elsewhere.

U.S. Automakers

Demand for the dollar may weaken after the Wall Street Journal reported General Motors Corp. will ask the U.S. government to provide aid to fund its operations or to provide financial support should it declare bankruptcy,

The U.S. automaker needs at least another $5 billion in government loans to keep operating beyond the first quarter and prevent it from filing for bankruptcy, the newspaper said Feb. 14, citing unidentified people familiar with the company.

“We need to watch closely developments about a turnaround plan at General Motors,” said Takashi Kudo, director of foreign- exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp., Japan’s largest fixed-line telephone company. “If GM files for Chapter 11 just as the weekend report had said, it will certainly trigger selling of the dollar.”

General Motors and Chrysler LLC, which had previously won approval for $17.4 billion in U.S. loans to prevent them from running out of cash for operations, must submit a progress report to the government by Feb. 17 as a condition of the loans. The automakers are seeking concessions from unions, lenders and creditors to comply with terms of the assistance.

British Pound

The pound also weakened against the dollar and the euro after the G-7 finance chiefs also avoided any reference to the U.K. currency.

There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling. Euro-pound in particular is likely to bounce on the back of this omission.”

The U.K. economy will shrink 3.3 percent this year, instead of the 1.7 percent predicted in November, the Confederation of British Industry said today. By the end of this year, the economy will have contracted for six consecutive quarters, it said.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.