Yen to Fall as Tax-Free Repatriation Boost Fades, Chandler Says

By Thomas R. Keene and Oliver Biggadike

Oct. 9 (Bloomberg) -- The yen will probably decline against the dollar over the next 12 months as “momentum” fades from a tax break that encourages repatriation of overseas profits to Japan, according to Brown Brothers Harriman & Co.

Japan’s currency traded today within 1.5 percent of its lowest this year versus the dollar as signs of a global economic recovery boosted the appeal of funding investments with the greenback instead of the yen. Since April 1, Japanese exporters have been able to bring back income earned outside the country without paying the combined 40 percent tax.

“It’s largely momentum trading right now and we’re pushing it because we haven’t reached a pain threshold of anything to stop us,” said Marc Chandler, global head of currency strategy at Brown Brothers in New York. “The reason the Japanese stock market underperforms despite having a strong yen is precisely because they have a strong yen. It’s eroding corporate profits.”

The yen rose 0.3 percent to 88.39 against the dollar in New York trading yesterday, its fourth straight day of gains and longest winning stretch since Sept. 11. Japan’s currency will probably fall to between 105 and 110 versus the dollar in the next 12 months, Chandler predicted.

“The most telling fact about Japan is that by the end of next year they’re going to have three million fewer workers than they did in 2005,” Chandler said, speaking in New York at a foreign-exchange conference sponsored by Bloomberg LP, the parent company of Bloomberg News. “That simple statistic tells you a lot about the challenges Japan has.”

The Nikkei 225 Stock Average rose 11 percent this year, lagging the 18 percent gain in the Standard & Poor’s 500 Index and the 49 percent advance in Hong Kong’s Hang Seng Index.

China’s Yuan

China could boost domestic demand in its economy by allowing the yuan to strengthen, said Gabriel de Kock, a senior strategist at JPMorgan Chase & Co. who spoke on the currency panel with Chandler and James McCormick, head of European fixed- income research at Nomura International Plc.

“The Chinese have a policy problem, which is to reallocate demand from foreign demand to domestic demand,” de Kock said. “One way to kill two birds with one stone is to allow the currency appreciate over time.”

To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net