Yen Rises as G-7 Says Slump to Persist, Japan’s Economy Shrinks

Feb. 16 (Bloomberg) -- The yen rose after finance ministers from the Group of Seven nations said the “severe” global slump will persist for most of 2009 and Japan’s economy shrank by the most since 1974, spurring investors to sell riskier assets.

The yen snapped two days of losses against the dollar and the euro as G-7 officials avoided making any statement in support of efforts by Japan to weaken its currency. The pound fell versus the dollar after the Confederation of British Industry said the U.K. economy will contract at almost twice the pace previously forecast this year. The euro also dropped against the dollar.

“Investors are starting to price in the prospect of this recession lasting longer than previously expected,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi Ltd., a unit of Japan’s largest publicly traded bank by assets. “The yen will remain quite firm in the next three months before it starts to drop off.”

The yen dropped to 117.21 per euro as of 4:51 p.m. in New York from 118.37 on Feb. 13. The yen gained to 91.77 against the dollar, from 91.93. The dollar strengthened to $1.2770 per euro, from $1.2862.

Japan’s currency may appreciate to 110 per euro in the next three months as the European economic outlook worsens, Hardman said. Japan’s own poor economy will drive currency to 100 versus the dollar by year-end, he said.

‘Disorderly Movements’

“Market reaction to the G-7 has been generally one of disappointment,” Geoff Kendrick, a senior currency strategist at UBS AG in London, wrote in a research note today. “Further follow-through in terms of dollar and yen strength should be expected.”

The G-7 repeated its message that “excess volatility” and “disorderly movements” in exchange rates must be avoided. The group accounts for about two-thirds of the world economy and is composed of the U.S., Japan, Germany, U.K., Italy, Canada and France.

Exchange-rate movements may be volatile today as a national holiday in the U.S. reduces trading volumes, said Masashi Kurabe, head of currency sales and trading at Bank of Tokyo-Mitsubishi in Hong Kong.

Japan’s economy shrank 12.7 percent in the fourth quarter from a year earlier, the Cabinet Office said today. That’s the third consecutive quarter gross domestic product has contracted.

The British pound fell against the dollar after the CBI, Britain’s biggest business lobby, said gross domestic product will shrink 3.3 percent this year, almost twice the 1.7 percent pace previously forecast. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.

BNP Paribas Forecast

“The dollar will benefit from renewed growth pessimism,” analysts led by Hans-Guenter Redeker, global head of currency strategy at BNP Paribas SA in London, wrote today. “Global economic weakness creates dollar demand via de-leverage and reversing cross border flows.” The dollar will rise to $1.22 per euro and 95 yen by the end of September, BNP Paribas said.

The MSCI World Index dropped 0.7 percent and the Dow Jones STOXX 600 Index of European shares fell 1.2 percent. Japan’s current-account surplus makes the yen attractive to investors in times of turmoil, as it means the country doesn’t rely on overseas lenders.

The pound was also hurt after the G-7 finance chiefs avoided any reference to the U.K. currency.

There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling.”

The British currency dropped to $1.4267 from $1.4355. It rose to 89.49 pence per euro.

Euro ‘Peripherals’

The euro weakened amid growing concern Ireland may default on its national debt. Credit-default swaps on the nation’s five- year sovereign debt jumped 49 basis points on Feb. 13 to a record 377 basis points, according to CMA Datavision prices. That’s 18 basis points more than Costa Rica’s.

The rising cost of insuring against default by a “peripheral” European government “remains an important background negative for the euro,” Steven Pearson, a strategist in London at Merrill Lynch & Co., wrote in a note today.