G7 message seen unlikely to give yen real boost
By Toni Vorobyova
LONDON (Reuters) - The Group of Seven's call on markets to consider Japan's strengthening economy and be wary of one-way bets in foreign exchange is unlikely to put investors off selling the yen anew.
Finance ministers and central bankers from the G7 industrialized powers said over the weekend that "Japan's recovery is on track" and expressed confidence that "the implications of these developments will be recognized by market participants."
European Central Bank President Jean-Claude Trichet went further, saying: "We want the markets to be aware of the risks of one-way bets, in particular on the foreign exchange market."
Japanese Finance Minister Koji Omi made similar comments.
But analysts said that what actually came out of the meeting is unlikely to be strong enough to give the yen any more than a short-term boost when the markets open on Monday.
"They didn't actually mention carry trades specifically in the communiqué but I think this is the first step in starting to warn markets of the risk. But they don't want to be responsible for bursting the bubbles themselves," said Ian Stannard, senior foreign exchange strategist at BNP Paribas.
"It may cause the yen to gain a little bit of ground but it is probably not enough to kick start any sustained turnaround in the yen at this stage," he added.
Bets on the yen have been clearly to the downside in recent months with investors using Japan's low interest rates to borrow yen cheaply to fund purchases of higher yielding units.
Such carry trades have driven the yen to record lows versus the euro and 21-year lows on a trade-weighted basis.
European politicians have voiced concern about the yen's weakness, although their U.S. and Japanese colleagues have played down the issue.
In the past week investors have trimmed short yen positions from record levels amid worries that the G7 could comment on the weak yen and the dangers of carry trades -- where profits can be easily wiped out by appreciation of the funding currency.
TOUGHER STANCE IN FUTURE?
The part of the communiqué that deals with currencies was largely unchanged from the September G7 meeting, calling for greater exchange rate flexibility in emerging economies with big current account surpluses, "especially China."
As such, analysts say it would have been hard for the G7 to openly criticize the recent movements in the yen which have been driven by markets rather than by any kind of interventions.
But the latest comments pave the way for a tougher stance in the future if yen weakness persists.
"The statement recognized the Japanese recovery and warned markets to incorporate this ... This signals that we could see the G7 pick up the issue again if the yen continues to weaken and we see, for example, euro/yen go to 160," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
WEAKNESS WON'T LAST FOREVER
Overall, most analysts do expect that the Japanese currency's fall will reverse during the course of 2007. The latest Reuters foreign exchange poll, taken last week, shows the dollar weakening to 111 yen in 12 months from around 121.66 on Friday. The euro is seen at 145.6 yen in a year versus 158.22 now.
"It will ultimately be a position unwinding story, it's just what provides a trigger... whether we need a stronger statement from the G7 or another shock," said Stannard at BNP.
A trigger for the unwinding of carry trades could come from expectations of more Bank of Japan rate hikes from the current 0.25 percent. Thus Japanese growth data for the final quarter of 2006 due on Thursday and a BOJ meeting the following week could have a bigger impact on yen sentiment than the G7.
A rise in overall risk aversion and, consequently, market volatility could also make people less willing to short the yen. Such a change in mood could, for example, be prompted by a sharper slowdown in the U.S. economy and the resulting rate cuts by the Federal Reserve, and concerns about the impact on global growth.
Japan is closed for a public holiday on Monday.
