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Yen May Fall After Koizumi Coalition Loses Seats in Parliament

Nov. 10 (Bloomberg) -- The yen may fall in Asian trading after Japan's coalition government lost seats in yesterday's elections, raising speculation the drop in public support may weaken Prime Minister Junichiro Koizumi's mandate to reform the economy.

Japan's currency, which has gained about 9 percent against the dollar in the past three months, may drop after Koizumi's Liberal Democratic Party failed to retain more than half the seats in parliament, losing 10 seats to 237 in the 480-seat lower house. The LDP-led coalition won 275 seats, down from 278 seats.

The drop in LDP support may force it to lean more on its coalition partners, and some investors may sell Japanese assets on concern Koizumi will have more trouble forcing through unpopular measures to clean up banks' bad loans and sell off state-owned corporations. The main opposition Democratic Party, or DPJ, was the biggest winner, securing 177 members, up from 137.

``Foreign investors may think the power of the LDP and the coalition is declining, and this could create some confusion,'' said Toru Umemoto, currency strategist at Morgan Stanley in Tokyo. ``The first reaction of foreign investors may be to sell the yen'' and yen denominated assets.

Japan's currency was trading at 109.35 to the dollar at 7.30 a.m. Tokyo, from 109.39 late Friday in New York. It was also at 125.89 per euro, from 126.09.

The yen may fall to 110 per dollar today, Umemoto said.

Mandate

``Longer-term, it's got to be a good thing if there is an effective opposition in Japan although in the short term the market won't particularly like it if there is a feeling that Koizumi has been weakened and hasn't had a strong enough mandate,'' said Scott McGlashan, who manages $125 million as chairman of Jade Absolute Fund Managers in London.

The LDP has governed Japan, with a 10-month exception, since 1955. With the elections bringing the country closer to a two-party system, the yen may benefit on speculation this will accelerate efforts to restructure the economy.

Koizumi has vowed to curb public works spending and clean up more than $400 billion of bad loans stifling the financial system and the DPJ has said bank restructuring is the country's most important economic issue.

``Investors should take this as a vote for aggressive reform,'' said Mike Newton, currency strategist in Hong Kong at HSBC Holdings Plc. ``The flows coming into Japan are because of expectations of restructuring. If the LDP does face genuine competition, they'll have to be more aggressive in pushing for restructuring than not.''

HSBC, the world's second-biggest bank by market capitalization, forecasts the yen rising to 107 per dollar by the end of the year.

Little Impact?

Some strategists said Koizumi's reduced majority probably won't hurt the yen too much. The yen has gained this year on expectations Japan's economic recovery is accelerating and foreigners have been net buyers of stocks for 27 of the past 29 weeks. The benchmark Nikkei 225 Stock Average has risen 29 percent the past six months.

``With the economy on the up and Asia leading growth'' in the global economy, the election result is ``not likely to hit the currency markets in a big way,'' said Johnathan Bayley, a strategist at Westpac Banking Corp. in Wellington.

Figures last month showed Japan's index of leading economic indicators was above 50 percent in September for the fifth consecutive month, signaling the economy will extend its recovery from recession.

Survey

The dollar may rise for a third consecutive week against the euro on signs the pace of economic expansion in the U.S. is exceeding the rate of growth in Europe, according to a Bloomberg News survey. Seventy-six percent of the 46 strategists, investors and traders polled on Friday from Tokyo to New York recommended buying or holding the dollar against the euro.

The dollar strengthened to as much as $1.1377 per euro last week, the most since Group of Seven finance ministers called on Sept. 20 for more flexible exchange rates, suggesting they favored a weaker dollar.

``We are entering a new paradigm where the dollar is going to be trading much better,'' said Paul Mackel, a currency analyst in London at ABN Amro Holding NV. ``After the G-7 meeting, the market pretty much dismissed good data and the dollar just could not rally; now the market is focusing on the data.''

The dollar was at $1.1513 per euro, from $1.1525.

Last Updated: November 9, 2003 17:31 EST