Yen Weakens as BOJ Share-Purchase Plan Revives Demand for Yield

Feb. 3 (Bloomberg) -- The yen fell, ending three days of gains versus the dollar and euro, after the Bank of Japan said it will buy 1 trillion yen ($11.1 billion) of shares held by financial companies, reviving demand for higher-yielding assets.

Japan’s currency dropped from near a one-week high versus the greenback after the central bank said in a statement it will purchase the equities through April 2010 to boost the capital of financial institutions. The Australian and New Zealand dollars also ended a three-day losing streak against the yen after the Australian government said it will spend A$42 billion ($26.8 billion) to help prevent the economy entering a recession.

“The packages being announced by governments worldwide are likely to have a large positive impact on market sentiment,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-biggest lender. “The yen may be sold.”

The yen declined 0.3 percent to 89.72 per dollar as of 1:15 p.m. in Tokyo, from late in New York yesterday. The currency dropped 0.7 percent to 115.71 per euro. The euro traded at $1.2898 from $1.2843. The British pound fell to $1.4245 from $1.4264 yesterday. Against the euro, the pound slipped 0.5 percent to 90.51 pence.

Australia’s dollar advanced to 57.57 yen from 56.49 yen in New York yesterday, and New Zealand’s dollar strengthened to 45.78 yen from 44.40.

The yen remained lower after the Reserve Bank of Australia cut its benchmark rate by 1 percentage point to 3.25 percent at a meeting today. The rate decision was forecast by economists surveyed by Bloomberg.

‘Reduce Risk’

The yen weakened against all 16 of the most-active currencies as the Bank of Japan said it resumed the stock purchases “to support financial institutions’ future endeavors to reduce market risk associated with stockholdings, and through which to ensure the stability of the financial system.”

Australia’s spending package includes A$12.7 billion in grants from next month to families and low-income earners and A$28.8 billion for infrastructure. The package will help the economy grow 1 percent this fiscal year and 0.75 percent in the year ending June 30, 2010, government figures show.

Benchmark rates are 3.25 percent in Australia and 3.5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere. In these so-called carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits.

Producer Prices

The euro traded near an eight-week low against the dollar before a report that may show European producer prices fell for a fifth month, giving the region’s central bank more room to cut interest rates.

Europe’s single currency may also pare gains versus the yen as prices of goods leaving euro-area factories probably dropped 1.2 percent in December after a 1.9 percent decline in November, according to a Bloomberg News survey of economists. The European Union statistics office releases the report at 11 a.m. in Luxembourg today.

European Central Bank President Jean-Claude Trichet reiterated in an interview on Bloomberg Television at the World Economic Forum in Davos, Switzerland, last week that the central bank’s next important meeting is in March, signaling policy makers will keep the rate unchanged at 2 percent on Feb. 5.

“As most recent data releases confirmed a further weakening in growth conditions, and inflation fell at a faster pace than initially anticipated, the probability for a policy step this week has risen considerably,” analysts led by Zurich- based Mansoor Mohi-Uddin at UBS AG, the second-biggest currency trader last year, wrote in a research report yesterday. “We expect the euro to remain in a broad downtrend.”

British Pound

The pound fell for a second day versus the dollar and the euro on concern a U.K. report will show construction shrank last month at the fastest pace in more than a decade.

“European currencies such as the euro and the pound are likely to remain under downward pressure,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “There are still worries over their economies and the credit crisis in the U.S. The bias is also for the yen to strengthen.”

The pound weakened versus 14 of the 16 most-active currencies as a U.K. index based on a survey of purchasing managers at building companies probably dropped to 29 in January, the lowest since the survey began in April 1997, a Bloomberg survey showed. The Chartered Institute of Purchasing and Supply and Market releases the data at 9:30 a.m. in London.