Barclays Says Yen to Drop to 125 on Shift in Savings

The yen will slump 5 percent this quarter, the worst start to a fiscal year since 1989, as Japanese invest more of their savings overseas, said Toru Umemoto, chief foreign-exchange strategist at Barclays Capital.

Individuals are seeking higher yields because the Bank of Japan may not raise its 0.5 percent benchmark interest rate until the third quarter, said Umemoto, the most-accurate yen forecaster last year in surveys by Bloomberg News. The currency will drop to 125 against the dollar, he said, the weakest since December 2002.

The yen has fallen against the 16 most-actively traded currencies over the past month, with the biggest losses suffered against those with higher yields such as the Australian and New Zealand dollars. Households gained confidence to invest offshore after Japan's economy grew at the fastest pace in three years in the fourth quarter, said Umemoto.

``The yen's downtrend will continue as Japanese, who are fed up with low returns, will continue to export capital,'' Tokyo- based Umemoto said in an interview on April 2. ``Individuals will play the leading role.''

Overseas assets held by Japanese households reached 46 trillion yen ($387.6 billion) in 2006, only 3 percent of their total financial holdings, based on Umemoto's own calculations.

`Not Particularly High'
There is ``room for households to shift money from safe but low-return deposits to riskier, higher-return assets abroad,'' said Masafumi Yamamoto, a strategist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader. ``The Japanese ratio at 3 percent does not look particularly high.''

Yamamoto is less bearish on the yen than his counterpart at Barclays, predicting the currency will fall to 119 a dollar by June 30. He said Japanese overseas holdings rose 27 percent last year from the previous year, citing data compiled by the Bank of Japan, monthly data from the Investment Trust Association Japan, and Citigroup's own estimates.

Japanese mutual funds boosted purchases of assets abroad to about 40 percent of the total from about 8 percent in 2002, according to the Investment Trust Association. The mutual funds now have about $244 billion of assets denominated in foreign currencies, including $98 billion in the U.S. dollar.

Higher Yields
The yen weakened 6.0 percent versus the New Zealand dollar and 5.5 percent against Australia's currency in the past month. Australian and New Zealand 10-year government bonds both offer a yield premium, or spread, of 4.20 percentage points over similar- maturity Japanese debt. Securities in Germany give an extra 2.4 points.

The ratio of Japanese household savings parked in banks and post offices accounted for about half of their total financial assets of 1,550 trillion yen, compared with 10 percent in the U.S. and 30 percent in Europe, Barclays' Umemoto said. That will continue to decrease as more funds go abroad, he said.

Credit Suisse and Fortis Bank were the two most bearish for the yen among 49 contributors to a Bloomberg survey last month, forecasting losses to 125 and 127 against the dollar this quarter. The median estimate was 117.

The yen gained 1 percent last quarter as some global funds exited carry trades, where they borrow and sell yen for better returns elsewhere, because of a global slump in stock markets. Local Japanese investors are taking their place with their own form of carry trade. (Bloomberg)