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. Last Updated: 07/27/2016

Yen Looks Set to Slide As Backers Stay Silent

LONDON -- Yen bears are spoiling for a fight and signs that Southeast Asian asset market turmoil has tipped the balance of power in their favor will make them hard to rebuff, analysts said.


Japan's economic recovery has shown signs of losing momentum in recent months and is expected to be further hobbled by slumps in Asian equities and sharp declines in the currencies of some Japan's main regional trading partners.


Traders feel better placed to force the yen down than they were in May, when the United States and Japan managed, by words alone, to pull the yen back from near-five-year troughs approaching 127 per dollar. The yen was quoted at 125.10/20 in European trade Tuesday morning.


"The yen is going in one direction and one direction only and there is nothing policy statements or intervention can do to stop this, given Japan is going into recession," said Mike Lenhoff, strategist at Capel-Cure Myers, who expects the yen to trade from 125 to 130 per dollar.


"The only prop for the Japanese economy has been exports and given the Southeast currencies have declined relative to the yen this has undermined the last leg Japan had to stand on."


The yen fell to within 2 percent of its May lows Tuesday without any sign of the verbal intervention that accompanied its slump to similar levels six months ago.


By contrast to the daily barrage of comments currency traders faced then, Japanese officials have kept their counsel. Even Eisuke Sakakibara, the senior Japanese Finance Ministry official nicknamed "Mr. Yen" for his ability to move markets, has refrained from talking up the yen.


"The only reason for not buying dollar/yen has been the fear of increased bilateral tensions over the trade issue," said Nick Parsons, currency strategist at Paribas Capital Markets in London. "But in the current fragile environment the U.S. is not going to be beating anyone up."


American trade officials have indeed kept mum so far, prompting traders to speculate that they recognize the scale of Japan's woes.


"We are looking at a bleak background in Japan and no prospect for export growth and the Americans have accepted this," said Lenhoff.


The yen has fallen 9.4 percent against the dollar and plummeted as much as 17 percent against the mark in the past three months. Even so, its fall has been outpaced by many currencies in Southeast Asia, a key destination for Japanese exports.


Concern about the Japanese banking industry, which is seeing unrealized profits on shareholdings wiped out as the Nikkei falls, is seen as another reason why the United States and Japan will be reluctant to jolt Japanese asset markets by calling for a stronger yen, analysts said.


According to estimates released by Daiwa Institute of Research earlier this year, a fifth of Japan's top 20 banks would see unrealized profits on shareholdings wiped out if the Nikkei were to close the fiscal year near current levels.