Bank of America Raises Yen Forecast to 117 a Dollar From 120

Sept. 12 -- Bank of America N.A. raised its 2007 forecast for the yen to 117 against the dollar as Japanese individuals invest fewer savings overseas.

The yen has rebounded from a 4 1/2-year low in June to become the best performer among the 16 most-active currencies in the past month as falling stocks discouraged Japanese housewives, pensioners and businessmen from taking out loans to buy higher- yielding assets. The Bank of Japan's 0.5 percent benchmark borrowing cost compares with 6.50 percent in Australia and 8.25 percent in New Zealand.

``Japanese investors' tolerance for risk is decreasing,'' Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo, said in an interview today. ``Their courage for investing overseas isn't as strong.''

The yen traded at 114.09 against the dollar at 11:13 a.m. in Tokyo compared with 114.27 in late New York yesterday and 124.13 on June 22. Fujii previously forecast the currency to fall to 120 against the dollar by year-end.

The strategist at the second-largest U.S. bank joins Barclays Capital, Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank Ltd. and Daiwa Securities Group in raising forecasts for the yen in the past three weeks. Bank of America's estimate compares with a year-end median forecast of 116 yen in a Bloomberg News survey of 44 strategists and economists.

Japanese investors sold more foreign bonds than they bought for a third month in August, with net sales of 690.4 billion yen ($6.05 billion), data from the Ministry of Finance showed today. The yen rose 2.4 percent versus the dollar last month.

`Hard to Imagine'

Japan's currency has jumped 7.8 percent since June 22, when Bear Stearns Cos., the fifth-biggest U.S. securities firm by market value, said it would bail out a hedge fund that lost money on securities related to subprime mortgages.

Borrowing of yen to purchase higher-yielding currencies by mom and pop investors has contributed to the more than 5 percent decline in the past year versus New Zealand's and Australia's dollars, favorite targets for so-called carry trades. Japanese investors have 1,536 trillion yen in financial assets, according to figures from the central bank.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

Yen short positions against seven major currencies such as the dollar and euro fell by 54 percent to 192,543 contracts on Aug. 17 from 420,758 on Aug. 9, according to Bloomberg calculations based on data from Tokyo Financial Exchange Inc., Japan's largest financial futures market.

A short position is a wager on a currency's decline. The contracts are denominated in 10,000 units of the foreign currency. The Bank of Japan estimated the Tokyo futures exchange has a market share of 5.8 percent of margin trades as of December 2006.

``It's hard to imagine risk appetite will return to the high levels of pre-market turmoil in August,'' Fujii said.

By Kosuke Goto (Bloomberg)

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