Wednesday, September 14, 2005

Some Say 'Sell the Yen' Despite Koizumi's Win

Contrarians Raise Doubts
About His Political Clout,
Favor Singapore's Currency

September 14, 2005

SINGAPORE -- The outlook for the yen may have turned more bullish in the aftermath of Prime Minister Junichiro Koizumi's landslide election victory, but some analysts say it is time to sell the Japanese currency against others like the Singapore dollar.

Shorting the yen may sound like the wrong strategy to adopt. Mr. Koizumi's victory is widely viewed as helping to accelerate an economic overhaul that will lure more foreign capital into Japanese equity markets in the near term and lead to yen appreciation in the medium term.

At the same time, Japan's economic growth appears to be picking up. Second-quarter gross domestic product grew a revised 0.8% from the first quarter, stronger than expected, and the Bank of Japan has suggested it may move toward ending its ultraeasy monetary policy.

But proponents of short-yen strategies believe that while the euphoria over the election may allow Mr. Koizumi to push through an overhaul of the postal system, his decision to step down next year means other proposed changes such as to the pension system may prove harder to achieve for his Liberal Democratic Party-led coalition. Based on that reasoning, the yen's prospects may not be as bullish as the market is reflecting.

"Since [Mr. Koizumi] defined party membership exclusively in terms of members' views on postal privatization, this does not necessarily imply that the party agrees on much else," HSBC Japan economist Peter Morgan said. As a result, Mr. Koizumi's effective strength in the LDP may be weaker than the election outcome indicates, he said.

The LDP and coalition partner New Komeito Party won 327 seats out of 480 in Sunday's Lower House elections, giving the coalition control over two-thirds of the chamber's seats -- enough to overrule decisions by the Upper House. Analysts like Rabobank's Asia Pacific head of research, Jan Lambregts, think the strong mandate will support Mr. Koizumi's efforts to overhaul the economy.

Nonetheless, said Toru Umemoto, chief currency strategist for Japan at Barclays Capital, "Koizumi's tenure is only for one year, so he's likely to be a lame duck, even if the [postal privatization] bill passes."

Mr. Koizumi's term as LDP president, and thus, prime minister, will end next September. Although speculation that he may extend his tenure has risen following the election victory, he has said that he has no plan to continue beyond that date. Also, regardless of whether his tenure is extended beyond next September, the government is likely to devote itself to fiscal consolidation, including consumption-tax increases, Morgan Stanley's Mr. Umemoto said. "This could be yen-negative" because of its potential for damping the economy, he said.

The U.S. dollar sank as low as 108.97 yen Monday in the wake of the election. But the yen's strength was short-lived, as investors took profits on their holdings of the Japanese currency. In New York yesterday morning, the U.S. dollar was quoted at 110.75 yen, up from 110.27 yen late Monday in New York.

In comparison, prospects for the Singapore dollar look strong both in terms of fundamentals and technical measures.

The Monetary Authority of Singapore has kept a policy of a gradual and modest appreciation of its trade-weighted exchange rate since April 2004 because of potential inflation from rising oil prices. According to traders, the de facto central bank also has been intervening regularly to shore up the Singapore currency.

Since reaching a one-month high of S$1.6904 on Aug. 31, the U.S. dollar has retreated to trade mostly between S$1.67 and S$1.68. In New York yesterday morning, the U.S. dollar was quoted at S$1.6827, up from $1.6776 late Monday.

"The for the currency to display strength rather than weakness," said Wong Keng Siong, economist at the Bank of Tokyo-Mitsubishi.

According to the monetary authority's quarterly survey of economists published this month, Singapore's economy is likely to grow 4.4% this year, up from 3.8% growth predicted in the June survey. The authority said economists expect the electronics segment to support the recovery in the industrial sector because of improving global demand.

The Singapore dollar's ability to hold to strong support at the Sept. 5 low of 64.99 yen also bodes positively for the currency. Early Monday, it fell to a one-week low of 65.11 yen but bounced back strongly to as high as 65.82 yen early yesterday. Traders who watch technical signs say it has a reasonable chance of retesting strong resistance at 66.03-66.14 yen.

The U.S. dollar received support yesterday from a narrower July trade deficit. In morning New York dealings, the euro slipped to $1.2280 from $1.2285 late Monday in New York. The dollar rose to 1.2604 Swiss francs from 1.2582 francs, while sterling rose to $1.8230 from $1.8193.


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