Bloomberg News

Yen Remains Weaker as Yield Gap Widens, Stocks Advance

August 07, 2012

The yen remained weaker against the dollar as the extra yield for two-year U.S. Treasuries over Japan’s government notes widened to the most in almost one month, dimming the appeal of the Asian nation’s debt.

Nine of 22 analysts surveyed by Bloomberg News said Japan’s central bank may scrap the yield floor on its purchases of longer-term debt as early as tomorrow. The euro fell against most of its major peers before data forecast to show industrial production in Germany, Europe’s biggest economy, dropped in June. Standard & Poor’s revised the outlook on Greece’s sovereign rating to negative from stable and placed Banco Popular Espanol S.A.’s BB+ on creditwatch with negative implications.

“The dollar-yen is becoming responsive to yield differentials,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company. “The euro will fall as economic fundamentals remain weak and there is little the ECB can do,” referring to the European Central Bank.

The yen traded at 78.55 per dollar as of 10:07 a.m. in Tokyo from 78.61 at the close in New York, when it fell 0.5 percent. The Japanese currency was little changed at 97.32 per euro from 97.46 yesterday, when it touched 97.82, the weakest since July 12. The 17-nation currency slid 0.1 percent to $1.2390.

The extra yield investors receive for holding two-year Treasuries compared with similar Japanese government notes rose to 17 basis points, or 0.17 percentage point, the most since July 9.

The MSCI Asia Pacific Index (MXAP) of stocks rose 0.7 percent, following a 0.7 percent advance in the MSCI World Index yesterday.

BOJ Meeting

The BOJ board will leave unchanged its 45 trillion yen ($572 billion) asset-purchase funds and the benchmark rate target between zero and 0.1 percent at its two-day meeting starting today, according to all 22 analysts in the survey.

Japan’s bond market is signaling the central bank may have to resort to buying notes at any price as it tries to flood the financial system with cash injections to boost lending and weaken the yen.

The BOJ abandoned its minimum rate for buying treasury discount bills and commercial papers last month after it failed on July 10 to attract enough bids in a six-month credit lending operation for the 14th straight time.

The yen remained weaker even after the country posted a bigger-than-expected current-account surplus in June. The excess in the widest measure of trade was 433.3 billion yen, compared with 215.1 billion yen in May, the Ministry of Finance said in Tokyo today. The median estimate of economists surveyed by Bloomberg News was for a surplus of 415.4 billion yen.

Industrial Production

German factory output, adjusted for seasonal swings and inflation, probably fell 0.8 percent in June from the previous month, when it gained 1.6 percent, according to median estimate of economists surveyed by Bloomberg before the Economy Ministry in Berlin releases its figures today.

The outlook on Greece’s CCC rating, already eight levels below investment grade, was revised to negative from stable, S&P said yesterday in a statement . The change reflects the risk of a downgrade if Greece is unable to obtain the next disbursement from the European Union and International Monetary Fund rescue package, the rating company said.

S&P said in a statement today it placed Banco Popular on creditwatch because Spanish lenders are likely to receive government support to recapitalize and holders of the banks’s hybrids and subordinated debt “will possibly absorb losses.”

Outlook Maintained

The ratings company also affirmed creditwatch negative outlooks on Bankia S.A., Banco Financiero y de Ahorros S.A. and Ibercaja Banco S.A.U.

“There are many challenges that lie ahead before the European debt crisis is resolved” said Sumino Kamei, a senior analyst in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group by market value. “It’s hard to have a positive view on the euro in the mid- to longer term as we continue to see downward pressure on the region’s economies.”

The euro has declined 4.4 percent in the past three months, the second-worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has gained 2.8 percent over the same period, while the dollar has advanced 0.9 percent.

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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