* Bets against yen rise as political pressure mounts on BOJ
to ease aggressively
* Some analysts believe yen could weaken about 10 pct based
on purchasing power
* Deteriorating trade balance also underlying factor for
* Key test lies at March low of 84.187 yen per dollar
* Heavy use of options to sell yen suggests limited risk of
By Hideyuki Sano
TOKYO, Nov 27 The yen's four percent decline in
less than two weeks could herald a longer-term trend as
investors have begun pricing in a possible game-changing shift
in monetary policy after Japan's Dec. 16 election as the likely
winner favours aggressive easing.
Shinzo Abe, the leader of the main opposition Liberal
Democratic Party, wants the Bank of Japan to set an inflation
target of 2 percent, and embark on "unlimited easing", adopting
negative interest rates and printing more money.
"The Liberal Democrats want to change the rules," said
Andrew Wilkinson, chief economic strategist at Miller Tabak & Co
in New York. "When you have a sea change like this, then it's
very possible you'll get a sharp change in both speculative and
commercial, corporate sentiment in the yen."
The yen stood at 82.10 yen to the dollar on Tuesday,
weakening from 79.40 yen in mid-November, when Prime Minister
Yoshihiko Noda finally gave in to pressures for an early
There are plenty of critics of Abe's ideas, both within the
BOJ and the broader business community, raising the possibility
that some proposals might be watered down or completely dropped.
But if Abe does reclaim the premiership he last held in 207,
he would also be able to pick a new central bank chief when
Masaaki Shirakawa's term as governor ends in April.
Abe has also threatened to change the law to take away the
Bank of Japan's independence so the government can impose a
Eiji Kinouchi, chief technical analyst at Daiwa securities,
said adopting a 2 percent inflation target potentially held
significant implications for the yen.
"Calculating from the past correlation between yen's
exchange rate and inflation expectations shown in
inflation-linked bonds, if inflation expectations hit two
percent, the yen could weaken another 15 percent," Kinouchi
"So we are not talking about the yen's fall to just around
84 yen. If inflation expectations do rise, even though that is a
big if, the yen could weaken to around 95 yen," he said.
GOOD FOR EXPORTERS, SHARES
The moderation in the yen's strength is a blessing for the
corporate sector as Japan's export reliant economy struggles to
avoid a recession that many economists say has already begun.
Due to fallout from a diplomatic dispute with China and
sluggish global demand, exports fell in annual terms for a fifth
month in October, with firms like Toyota Motor Corp and
camera and printer maker Canon Inc handicapped by the
Analysts estimate that for every one yen rise in the
yen/dollar exchange rate, combined recurring profits at all the
listed Japanese firms would rise about one percent.
And further yen weakness should help boost shares of
long-suffering exporters and further lift a Tokyo's Nikkei stock
average that has gained more than 8 percent since the
election was called in mid-November.
Shares of Sony, Panasonic and Sharp
are all struggling near three decade lows due to the
hi-tech sector's loss of competitiveness.
2.5 PCT AWAY FROM CRUCIAL TEST
The yen had struck a record high of 75.311 per dollar in
October last year because of the currency's status as a
safe-haven, while the global economy lurched from crisis to
crisis, first in the U.S. mortgage debt market and then in
European debt market.
The yen hit a low for the year of 84.187 to the dollar in
March, after a six-week slide brought about by expectations of
BOJ easing finally fizzled out.
To convincingly establish a bearish trend and break an
uptrend that has been in place since June 2007, analysts say,
the yen will have to weaken beyond the March low. It has 2.5
percent further to go to test that level.
Analysts say the yen still looks about 10 percent
overvalued compared to its purchasing power parity, leading some
market players to think the yen could possibly weaken to at
least around 90 yen per dollar.
Wilkinson went further. He expected the yen to test 100 to
the dollar within 2013, a level not seen since 2009, and
possibly by next June, if the new government is proactive in
persuading the central bank to take aggressive easing steps.
The yen's status as a safe haven is also being eroded by
Japan's deteriorating balance of payments position, and a
increased dependence on imported fossil fuels after the shutting
down of most of the country's nuclear power plants after last
year's nuclear disaster.
So far, traders say the yen's recent slide has been mostly
driven by speculators, especially momentum-chasing hedge funds,
who will eventually need to cover their positions, suggesting
the currency could rebound sharply.
Indeed, U.S. regulator's data showed on Monday that net yen
short positions in the Chicago futures market have already
soared to over 50,000 contracts, not far from peaks around
60,000 contracts seen a few times in recent years.
But speculators are heavily using options rather than
selling the yen outright, so they will be under less pressure to
buy back yen should the market move against them, limiting the
risk of a sharp reversal, said a trader at a European bank.