Yen Rises as Improving Japan Economy Set to Fuel Fund Inflows

By Yasuhiko Seki

May 29 (Bloomberg) -- The yen climbed from a two-week low against the dollar after a Japanese report showed industrial production rose the most in 56 years, fueling optimism funds will flow back into the nation’s assets.

The yen extended a second monthly gain versus the U.S. currency, paring yesterday’s biggest drop in eight weeks, after the Trade Ministry report also showed companies planned to increase output. The dollar weakened versus the euro as South Korea said the National Pension Service will cut its weighting of U.S. Treasuries. The Australian and New Zealand dollars advanced for a third month as rising commodity prices boosted demand for the two currencies.

“The strong output data raised expectations for rises in capital inflow into Japanese assets,” said Masashi Hashimoto, Tokyo-based senior foreign-exchange analyst at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s largest lender. “As worries about the global gloom ease, the correlation between the yen and economic data and stock prices may turn positive.”

Japan’s currency climbed to 96.49 per dollar as of 1:51 p.m. in Tokyo from 96.85 in New York yesterday, when it fell to 97.24, the weakest since May 12. The yen traded at 134.96 per euro from 135.04 yesterday, when it touched 135.29, the lowest since April 7. The dollar fell to $1.3987 per euro from $1.3941.

Australia’s currency advanced to 78.95 U.S. cents from 78.40 cents yesterday, after rising to 79.16 cents, the strongest since Oct. 2. It has risen 8.9 percent this month. New Zealand’s dollar climbed to 62.80 U.S. cents from 62.33 cents. It climbed 11.1 percent this month.

Factory Production

The yen gained versus 11 of the 16 most-traded currencies after the Trade Ministry said factory production climbed 5.2 percent in April from March, when it rose 1.6 percent. The median estimate of 30 economists surveyed by Bloomberg News was for a 3.3 percent increase.

Bank of Japan Governor Masaaki Shirakawa said this week the world’s second-largest economy will grow this quarter after contracting a record 15.2 percent in the three months ended March 31.

“The better-than-expected output data seem to suggest the Japanese economy has bottomed out and may continue to surprise in coming months,” said Taro Saito, senior economist in Tokyo at NLI Research Institute Ltd., a unit of Japan’s biggest life insurer.

Dollar Falls

The dollar dropped for a second day versus the euro, losing 5.4 percent this month, after the Korean Health Ministry said the national pension fund plans to hold fewer U.S. Treasuries relative to other assets.

“The report of the Korean pension fund’s plan to reduce its weighting of U.S. Treasuries triggered buying of the euro against the dollar,” said Takashi Kudo, director of foreign- exchange Sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “With the dollar still sensitive to speculation related to its debt finances, the market is waiting for the visit to China next week by U.S. Treasury Secretary Timothy Geithner for fresh trading leads.”

China is the biggest holder of U.S. government debt.

The euro also advanced versus the dollar as crude oil traded near a six-month high, adding to speculation the European Central Bank will avoid cutting interest rates so as to avoid stoking inflation.

‘Support the Euro’

“Rising crude oil prices give little reason for the ECB to take action on interest rates,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co. “The yield advantage will support the euro.”

The ECB’s benchmark policy rate is 1 percent, compared with as low as zero in the U.S. and 0.1 percent in Japan. Crude oil rose as high as $65.44 a barrel in New York yesterday, the most since Nov. 5. Crude oil prices have doubled from their low of $32.40 on Dec. 19, 2008, heading for their biggest monthly gain since March 1999.

The Australian and New Zealand dollars strengthened as investor confidence in a global recovery buoyed prices of raw materials and higher-yielding assets. Prices of commodities, which account for more than half of the two South Pacific nations’ exports, climbed 12 percent this month, the most since 1974, Bloomberg data show.

Best Monthly Performer

New Zealand’s dollar is the best performer this month among the most-active currencies against the U.S. dollar and yen after Finance Minister Bill English yesterday unveiled a budget that deferred tax cuts to avert the threat of a credit-rating downgrade that would have driven borrowing costs higher and delayed a recovery from the worst recession in three decades.

Australia’s dollar is the third-biggest gainer versus the U.S. and Japanese currencies in May as the Standard & Poor’s 500 Index added 3.9 percent since the end of April for a third straight monthly advance.

“There is no reason to sell the Australian dollar right now,” said Morio Okayasu, chief analyst at Monex FX Inc., a unit of Japan’s third-largest online broker. “Investors now want to take risks, such as commodities, assets in Australia, New Zealand and South Africa.”

The yen declined 1.8 percent against the dollar this week as optimism about a global recovery spurred Japan’s investors to look abroad for higher returns.

Japanese investors bought 641.1 billion yen ($6.61 billion) more overseas bonds and notes than they sold in the week ended May 23, the biggest net purchases in a month, according to the finance ministry.

“Japanese investors are now willing to take risks,” said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “The yen is likely to be sandwiched by capital inflow into Japan and capital outflow from Japan.”

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.