Another prediction on Yen

18 Mar 2011 Analysts take the measure of the yen in wake of crisis By NEIL BEHRMANN IN LONDON JAPAN'S economy is likely to benefit in the short term as a result of the yen, which is expected to weaken substantially from its current unsustainable heights, said Brendan Brown, London- based chief economist of Mitsubishi UFJ Securities International. While Mr Brown, rated the current top forecaster on Japan by Bloomberg, does not predict an exchange rate, Goldman Sachs expects the US dollar to appreciate by some 6 per cent to 84-85 yen within three to six months and 90 yen in 12 months. The US dollar slumped to a post-WWII nadir of 76.4 yen during New York trading hours, but subsequently recovered to around 79 yen. The low occurred at a time when trading volumes were very low, according to dealers. Closures of short yen positions on derivatives markets caused the spike, they said, and the dollar subsequently rebounded on fears that the Bank of Japan would intervene. 'The upward speculation on the yen since triple disaster (earthquake, tsunami, nuclear) struck Japan makes just about zero sense,' Mr Brown told BT. He believes that repatriation of liquid foreign assets by insurance companies will not have much influence on the yen. The knee-jerk reaction of the markets is thus likely to be proved wrong, Mr Brown believes. 'The speculators on yen appreciation point to what happened after the Kobe earthquake in early 1995,' he said. 'But the yen's climb at that time had virtually nothing to do with the earthquake. Much more important was the sudden slide of the US economy into growth recession amid the Mexico debt crisis at the time and a variety of other factors that caused US dollar weakness.' Looking further back, the Tokyo earthquake and tsunami of 1923, destruction was on a scale which also transcended comprehension, Mr Brown added. The yen plunged and remained weak for years until ultimately there was a late short-lived attempt to restore the gold standard in January 1930. Facts and estimates about the present triple disaster for Japan (GDP of around US$5 trillion) are still largely guesswork. But the estimates now circulating put insured losses at around US$35 billion and reconstruction costs for government (central and local) at around US$30 billion. On top of that, there is the non-insured damage in the private sector. Then, there is the loss of economic output as a result of the disasters. Some immediately available estimates put the economic output in normal times in the stricken regions at 7-10 per cent of Japan's GDP. And there is the loss of output from Japan's nuclear power plants, which over a sustained period will have to be replaced by imported energy. Evidently, these total output losses far exceed the damage estimates. Most plausibly, the combination of post-quake forces thus imply that there will be a substantially weaker trade balance over an extended period. This cumulative deterioration of the trade account would surely outweigh any repatriation flows, which were the immediate focus of speculative flows into the yen, Mr Brown said. There is no immediate funding problem for reconstruction and aid as the Japanese government can issue treasury bills.