Steer Clear Of Japan, Unless You Have A Yen For Undervalued Currency

The Age

Tuesday June 19, 2007

Vanessa Burrow

YOU have to pity anyone with a stash of yen to sell. A year ago the Japanese currency would have bought about $A1.17, or US86?. Now, you'd be lucky to get 96? Australian, or US81? (see graph).

In the past few days, the US dollar reached a 41/2-year high against the yen.

And, with the Bank of Japan taking a softly-softly approach to the subject of rising interest rates, it seems the yen will remain one of the developed world's most undervalued currencies.

Westpac chief currency strategist Robert Rennie said the Bank of Japan's reluctance to tighten monetary policy had created an "almost perfect environment for buyers of the Australian dollar".

Even if official Japanese interest rates were increased to 1 per cent by the end of the year, there would still be a huge rate differential to be taken advantage of, he said.

"The yen is low because (Japanese) interest rates are low and Japanese mums and dads are investing very heavily in overseas markets.

"It's desperately attractive for Japanese investors to invest in overseas bonds and equity markets."

But, in a research report, Goldman Sachs JBWere economists Tim Toohey and David Colosimo said they expected the yen to strengthen in the coming 12 months.

One factor would be an unwinding of the "carry trade", as described above, when investors borrow a low-interest currency like the yen to invest in a currency with high interest rates such as the dollar.

"Two potential trigger points to watch in this respect are: a significant rise in the Japanese Government Bond yields as the Bank of Japan continues to normalise policy rates; and a rise in broader asset market volatility," they wrote.

Mr Toohey and Mr Colosimo have also increased their targets for the Australian dollar, expecting it to remain near US85? for the coming six months.

A year from now, they expect the Aussie will be buying US82?.

Last night it was buying US84.45?.

Yesterday, the Chinese sharemarket rose to a record, erasing losses incurred two weeks ago when the Chinese Government raised stamp duty on sharemarket trades.

The benchmark CSI 300 Index rose almost 3 per cent.

In Australia, the benchmark S&P/ASX 200 Index rose 49.6 points to 6343.4 points, an increase of 0.8 per cent.

Major contributors to the gain were BHP Billiton, which rose 68? to a record $34.68 as metal prices continued their strong run. Rio Tinto, which passed through the $100-a-share mark for the first time, also helped to move the index. It gained $2.59, closing the day a cent below the milestone at $99.99.

Supermarket giant Woolworths gained 28? to $27.79 and Toll Holdings added 57? to $15.35.

Electrical retailer Clive Peeters, which had lost about 30 per cent of its market capitalisation last week, improved by 4.8 per cent, or 10?, to finish the day at $2.20.

Austock has placed a buy recommendation on the stock, despite a drastically reduced net profit guidance for the financial year.

"Long-term investors will be rewarded at current prices," the Austock report said.

In an alteration to the S&P/ASX 200 Index, Standard & Poor's said it would remove Veda Advantage from the index on June 25, subject to court approval of the proposed scheme of arrangement that would see the company purchased by VA Australia.

VA has offered $3.61 a share for Veda.

Standard & Poor's said Veda Advantage would not be replaced in the S&P/ASX 200, because the 200-member index contained 202 securities. Toll Holdings spin-off Asciano Group was member No. 202.

? To keep track of your investment universe using a portfolio tracker and other analytical tools, go to theage.com.au/businessday

© 2007 The Age

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