Dollar to Benefit From Japan Outlook Cut, Mizuho Asset Says

By Theresa Barraclough

Jan. 26 (Bloomberg) -- The dollar and U.S. Treasuries are likely to benefit from Japan’s outlook downgrade by Standard & Poor’s, according to Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

S&P cut Japan’s outlook to “negative” citing diminishing “flexibility” to cope with the nation’s swelling debt load. The credit-rating company said the Democratic Party of Japan’s policies “point to a slower pace of fiscal consolidation than we had previously expected,” adding that the rating could be cut if the government fails to come up with measures to spur growth and economic data remains weak.

The outlook revision is likely to push 10-year Treasury yields down to 3 percent by the end of March as investors seek safer assets, said Akira Takei, a fund manager in Tokyo at Mizuho Asset. The company has reallocated about 5 percent of its European holdings to U.S. Treasuries, he said.

“The knee-jerk reaction is the weaker yen, but the big winner is the dollar,” Takei said. “It’s caused a flight-to- quality bid, and the dollar will be stronger against other major currencies. Treasuries are the best place to be during turmoil.”

The dollar pared earlier losses versus the yen after the announcement, strengthening as much as 0.3 percent before trading at 90.22 yen at 7:19 a.m. in London, from 90.28 yesterday in New York.

Ten-year Treasury yields declined five basis points to 3.58 percent, according to BGCantor Market Data.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net