A Sharp, Swift Slide for Yen

A Sharp, Swift Slide for Yen

Currency Sinks 12% Versus Dollar; Euro Hits 11-Month High After Intervention

By ALEX FRANGOS And TOM LAURICELLA
Just three weeks after spiking to a record high against the U.S. dollar, the Japanese yen is in full retreat.

On Wednesday, the currency weakened to ¥85—a level not seen since late September. That marks a plunge of about 12% since mid-March, when a sudden surge sent the Japanese currency to ¥76.32 versus the dollar and prompted the world's central banks to jump in to quell the rise.

The yen has fallen across the board after surging three weeks ago.
.The yen's losses have been across the board, with big declines suffered at the hands of the euro—which hit an 11-month high against the yen on Wednesday—and against high-yielding currencies such as the Australian dollar.

While the global intervention was expected by many traders to put some pressure on the yen, the sharp decline has come as a surprise to many. Traders attribute much of the move to the growing belief that the Bank of Japan will loosen monetary policy even further to help the country recover from the disastrous earthquake and tsunami.

Adding pressure is a likely pick up in the so-called carry trade, where traders borrow in yen at near-zero interest rates and use the money to buy assets in currencies where yields are high, like the Australian dollar and the Brazilian real.

"The yen is a low-yielding currency at a time when there's appetite for yield," said Daniel Katzive, a currency strategist at Credit Suisse.

The Bank of Japan meets Thursday to decide on its next steps for monetary policy. Expectations are that the central bank will stress the need to continue aggressive efforts to prop up the economy through purchases of bonds and other securities. Some analysts believe the BOJ will announce an expansion of those steps, known as quantitative easing, which would likely fuel continued yen weakness.

"The path of least resistance has been to sell the yen," said Paul Mackel, senior currency strategist for HSBC in London.

Late Wednesday, the euro was at $1.4331 from $1.4221 late Tuesday. The dollar was at ¥85.43 from ¥84.83, while the euro traded at ¥122.43 from ¥120.64. The U.K. pound bought $1.6333 from $1.6278. The dollar changed hands at 0.9189 Swiss franc from 0.9252 franc.

Traders are increasingly expecting yen weakness, a belief that is likely to see carry trades pick up, further adding to pressure.

For starters, last month's coordinated intervention is seen as putting a cap on the yen's ability to rise. For traders putting on carry trades, a rise in the currency used to borrow money can quickly wipe out profits.

In addition, damage from the earthquake is expected to slash exports from Japan. Exporters are usually big buyers of yen as they bring profits home. The end of March marked the end of a period where Japanese corporations repatriate profits ahead of fiscal year end. April is often a period of yen weakness as that buying fades, analysts say.

A weaker yen should aide embattled Japanese companies.

Hitachi Ltd. President Hiroaki Nakanishi said Wednesday that the yen is now in a "more natural state." Hitachi designed its budget for the next 12 months based on a dollar exchange rate of about ¥80, he said.

"For us, it would be favorable if the dollar remained stable in the ¥85-¥90 range," he said.

Despite the yen's recent losses, it is still much stronger than it was just a year ago, when it was changing hands at more than ¥93 versus the dollar.

For years, the yen has become known as a "Teflon currency," strengthening despite the negative effects of the country's economic malaise and massive budget deficits, and frustrating Japanese companies and politicians.

But the steady drop in recent weeks is encouraging the view that a turning point could finally be at hand.

Analysts at Nomura Securities said the break through ¥85 "could be significant from a medium-term perspective and we would not be surprised to see a trend of further yen weakness."

Nomura is predicting the currency will fall to ¥90 versus the dollar in the first half of 2012 as U.S. interest rates rise and Japan's stay anchored.

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.Other banks, too, are targeting a weaker yen over the course of this year. Standard Chartered PLC, for example, figures it will weaken to ¥90 against the dollar in the fourth quarter of this year.

Axel Merk, chief investment officer at currency managers Merk Investments, said that the rebuilding effort itself could contribute to coming yen weakness. That is in part because the yen's resilience over the past two decades has been the product of the Japanese consumers saving and the country's big current account surplus, he said.

"If the government is getting their act together [for rebuilding] then they're going to have to spend money," said Mr. Merk. "That's going to put more pressure on the Bank of Japan to print money."

—Chester Dawson and Yoshio Takahashi contributed to this article.
Write to Tom Lauricella at tom.lauricella@wsj.com and Alex Frangos at alex.frangos@wsj.com